AT - AUDIT PLANNING

Question 1

What is audit planning?

Answer 1

Audit Planning involves developing a GENERAL AUDIT STRATEGY and a DETAILED APPROACH for the expected conduct of the audit. The auditor’s MAIN OBJECTIVE IN PLANNING THE AUDIT IS TO DETERMINE THE SCOPE OF THE AUDIT PROCEDURES TO BE PERFORMED.

The extent of planning will depend on:

1. Size of entity
2. Complexity of audit
3. Auditor’s knowledge and experience with the client’s business.

Question 2

PSA 315 requires the auditor to OBTAIN SUFFICIENT UNDERSTANDING OF THE ENTITY AND ITS ENVIRONMENT. What are some specific examples of these?

Answer 2

1. Industry, regulatory and other external factors
2. Nature of the entity and
3. Objectives and strategies and related business risks
4. Measurement and review of the entity’s performance
5. Internal Control

Question 3

What is the purpose of knowing the client’s business and industry?

Answer 3

1. To be able to IDENTIFY AND UNDERSTAND EVENTS,TRANSACTIONS AND PRACTICES THAT MAY HAVE A SIGNIFICANT EFFECT ON THE FS.
2. To be able to understand the objective and strategies and related risks, and the measurement of performance to identify pressures that may motivate management to manipulate the FS.

Question 4

What are some sources of information from which the auditor can obtain knowledge of the industry of the client? What are the uses of the information obtained?

Answer 4

Sources of information
1. Review of prior year working papers
2. Tour of client facilities
3. Discussion with people in and out of the entity
4. Reading books/periodicals/corporate documents/reports
Uses of information
1. Assessing risk and identifying potential problems
2. Planning and performing the audit effectively and efficiently
3. Evaluating audit evidence as well as the reasonableness of client’s representations and estimates
4. Providing better service to the client

Question 5

For first time audits, PSA 510 requires the auditor to obtain SAE that?

Answer 5

1. Opening balances do not contain material misstatements that affect the current year
2. The prior period closing balances have been correctly brought forward to current period
3. Appropriate accounting policies are consistently applied, or adequately disclosed if it was changed.

Question 6

What is materiality?

Answer 6

“Information is material if its omission or misstatement could influence the economic decision of users taken on the basis of the FS.”

Materiality may be viewed as:

a. The largest amount that the auditor could tolerate in the FS or
b. The smallest aggregate amount that could misstate the FS

Materiality is a matter of professional judgment

Question 7

What is the importance of materiality in planning the audit?

Answer 7

It is important because it allows the auditor to DETERMINE THE AMOUNT OF EVIDENCE TO ACCUMULATE, and THE SCOPE OF AUDIT PROCEDURES.

Question 8

What is the relationship between materiality and evidence?

Answer 8

Inverse.

More evidence will be required for a low peso amount of materiality than for a high peso amount.

Question 9

What is the importance of materiality in the completion phase?

Answer 9

It is used to EVALUATE THE EFFECT OF MISSTATEMENTS ON THE FS.

Question 10

What are the steps in using materiality in an audit?

Answer 10

1. Determine the Overall Materiality - FS LEVEL
2. Determine the Tolerable Misstatement - Account balance level
3. Compare the aggregate amount of uncorrected misstatements with the overall materiality.

Question 11

What is audit risk?

Answer 11

Audit risk refers to the risk that the auditor gives an inappropriate audit opinion on the FS. As the desired level of audit risk decreases, the auditor should design more effective substantive procedures.

Audit Risk = Inherent x Control x Detection risk

Question 12

What is inherent risk?

Answer 12

Inherent risk is the susceptibility of an account balance or class of transactions to a material misstatement assuming that there were no related internal controls. This concept recognizes that SOME ACCOUNT BALANCES, BY THEIR NATURE, ARE MORE SUSCEPTIBLE TO MISSTATEMENT THAN OTHERS.

As the assessed level of inherent risk increases, the auditor should design more effective substantive procedures.

Question 13

What is control risk?

Answer 13

Control risk is the risk that a material misstatement that could occur in an account balance or class of transactions WILL NOT BE PREVENTED OR DETECTED AND CORRECTED ON A TIMELY BASIS by the accounting and internal control systems.

As the assessed level of control risk increases, the auditor should design more effective substantive procedures.

Question 14

What is detection risk?

Answer 14

Detection risk is the risk that the auditor’s substantive procedure will not detect a material misstatement

As the acceptable level of detection risk decreases, more effective audit procedures should be designed and implemented.

Question 15

What is the relationship between materiality and audit risk?

Answer 15

Inverse.

The higher the materiality level, the lower the audit risk and vice versa.

Question 16

What are risk assessment procedures?

Answer 16

RAP are performed to

1. OBTAIN AN UNDERSTANDING OF THE ENTITY AND ITS ENVIRONMENT INCLUDING ITS INTERNAL CONTROL and
2. ASSESS THE RISKS OF MATERIAL MISSTATEMENTS IN THE FS

It includes:

a. Inquiries
b. Analytical procedures
c. Observation
d. Inspection

Question 17

What are analytical procedures?

Answer 17

AP involves ANALYSIS OF SIGNIFICANT RATIOS AND TRENDS, including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or DEVIATE from predicted amounts.

PLAUSIBLE RELATIONSHIPS AMONG DATA MAY REASONABLY BE EXPECTED TO EXIST AND CONTINUE IN THE ABSENCE OF KNOWN CONDITIONS TO THE CONTRARY.

Question 18

What are the steps in the application of analytical procedures?

Answer 18

1. Develop expectations regarding FS using:
   a. Prior year FS
   b. Anticipated results(budget and forecasts)
   c. Industry averages
   d. Non-financial info
   e. Typical relationships among FS account balances
2. Compare expectations with FS under audit
3. Investigate significant differences

Question 19

What is an audit plan?

Answer 19

Audit plan is an overview of the expected scope and conduct of the audit.

Question 20

What is an audit program?

Answer 20

The audit program serves as a set of instructions to assistants involved in the audit and as a means to control and record the proper execution of the work.

Question 21

What is a time budget?

Answer 21

Time budget is an estimate of the time that will be spent in executing the audit procedures listed in the audit program.

Question 22

Audit standards _____ that the basis used to determine the preliminary judgment about materiality be documented in the audit files.

a. permit
b. do not allow
c. require
d. strongly encourage

Answer 22

C

Question 23

In what phases are analytical procedures REQUIRED to be performed?

Answer 23

1. Testing phase

2. Completion phase

Question 24

Which of the following statements is not correct about materiality?
a Materiality recognizes that some matters are important for fair presentation of FS in conformity with the applicable financial reporting framework, while others are not important
b. 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 FS
c. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments
d. An auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable person who will rely on the FS

Answer 24

b. 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 FS

Should be smallest aggregate

Question 25

At what levels must the auditor assess materiality in planning an audit?

Answer 25

During the planning of an audit, auditor must assess materiality at:

a. FS level
b. Account balance level

Question 26

Performance materiality is the term used to indicate materiality at the:

a. balance sheet level
b. account balance level
c. income statement level
d. company-wide level

Answer 26

b. account balance level

Question 27

Which of the following is the primary basis used to decide materiality for a profit-oriented entity?

a. net sales
b. net assets
c. net income before tax
d. net income after tax

Answer 27

c. net income before tax

Question 28

The relationship between materiality and risk is ordinarily

a. Direct
b. Parallel
c. Inverse
d. Indirect

Answer 28

c. Inverse

Question 29

When comparing level of materiality used for planning purposes and the level of materiality used for evaluating evidence, one would most likely expect
a. level of materiality to be always similar
b. level of materiality for planning purposes to be smaller
c the level of materiality for planning purposes to be higher
d. the level of materiality for planning purposes to be based on total assets while the level of materiality for evaluating purposes to be based on net income

Answer 29

b. level of materiality for planning purposes to be smaller

Question 30

Auditing standards ____ that the basis used to determine the preliminary judgment about materiality be documented in the audit files

a. permit
b. do not allow
c. require
d. strongly encourage

Answer 30

c. require

Question 31

T or F

Materiality is a relative rather than an absolute concept

Answer 31

True

Question 32

Which of the following statements is not correct?

a. Materiality is a relative rather than an absolute concept
b. The most important base used as the criterion for deciding materiality is total assets
c. Qualitative factors and quantitative factors affect materiality
d. Given equal peso amounts, frauds are more important than errors

Answer 32

b. The most important base used as the criterion for deciding materiality is total assets

Question 33

The acceptable level of detection risk is inversely related to the

a. assurance provided by substantive tests
b. risk of misapplying auditing procedures
c. preliminary judgment about materiality levels
d. risk of failing to discover material misstatements

Answer 33

a. assurance provided by substantive tests

low detection risk needs a high assurance from substantive tests

Question 34

Which of the following is not a preliminary consideration when assessing inherent risk?

a. nature of client’s business
b. existence of related parties
c. degree of separation of duties
d. susceptibility of defalcation

Answer 34

c. degree of separation of duties

relates more to control risk

Question 35

Inherent risk is ___ related to detection risk and ____ related to the amount of audit evidence

a. directly, inversely
b. directly, directly
c. inversely, inversely
d. inversely, directly

Answer 35

d. inversely, directly

IR inversely related to detection risk, higher IR needs more audit evidence

Question 36

T or F
For all audits of FS made in accordance with PSAs, the use of analytical procedures is required to some extent in the planning stage.

Answer 36

T

Question 37

T or F
For all audits of FS made in accordance with PSAs, the use of analytical procedures is required to some extent in the review stage.

Answer 37

T

Question 38

T or F
For all audits of FS made in accordance with PSAs, the use of analytical procedures is required to some extent as a substantive test.

Answer 38

F

Question 39

To help plan the nature, timing and extent of substantive auditing procedures, preliminary analytical procedures should focus on

a. enhancing the auditor’s understanding of the client’s business and events that have occurred since the last audit date
b. developing plausible relationships that corroborate anticipated results with a measurable amount of precision
c. applying ratio analysis to externally generated data such as published industry statistics or price indices
d. comparing recorded financial information to the results of other tests of transactions and balances

Answer 39

a. enhancing the auditor’s understanding of the client’s business and events that have occurred since the last audit date

Question 40

The audit program cannot be finalized until

a. Consideration of the entity’s internal control has been completed
b. engagement letter has been signed by the auditor and client
c. significant deficiency has been communicated to the audit committee of the BoD
d. Search for unrecorded liabilities has been performed and documented

Answer 40

a. Consideration of the entity’s internal control has been completed