Audit Planning Flashcards

1
Q

What audit decisions might be influenced by the auditor’s preliminary judgment of materiality?

A
  1. Which accounts to test.
  2. Which items within a population to test.
  3. Which client locations to visit.
  4. Which differences to investigate while performing analytical procedures.
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2
Q

What is the goal of a financial statement audit?

A

To reduce audit risk to a reasonably low level.

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3
Q

Audit risk is a function of what three variables?

A
  1. Inherent risk
  2. Control risk
  3. Detection risk
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4
Q

What factors influence inherent risk?

A
  1. Size of account balance
  2. Complexity of accounting rules.
  3. Complexity of mathematical calculations
  4. Judgment or estimates involved
  5. Unusual/nonroutine transactions
  6. Susceptibility of assets to theft
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5
Q

What two steps does the auditor perform to assess control risk?

A
  1. Evaluate the design of the internal control system

2. Test whether the controls are being followed

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6
Q

What is the relationship between risk of material misstatement and detection risk?

A

An inverse relationship. When RMM is high, the auditor must take actions to reduce detection risk.

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7
Q

What actions can an auditor take to reduce detection risk?

A
  1. Increase the number of transactions tested
  2. Test closer to the Balance Sheet date
  3. Use more experienced personnel
  4. Gather more reliable evidence
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8
Q

During what two stages of the audit is the auditor required to perform analytical procedures?

A
  1. During the planning stage.

2. During the overall review stage

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9
Q

What is the purpose of performing analytical procedures during the planning stage of the audit?

A

To identify unusual transactions and suspicious account balances.

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10
Q

What is the purpose of performing analytical procedures during the overall review stage of the audit?

A

To evaluate the overall fairness of the financial statements and to assess the entity’s ability to continue as a going concern.

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11
Q

What is the purpose of performing analytical procedures as a substantive test?

A

To gather evidence about whether account balances are fairly stated.

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12
Q

What three methods may an auditor use to form an expectation about an account balance, and which method produces the most/least reliable estimates?

A
  1. Trend analysis (least reliable)
  2. Ratio analysis
  3. Model-building (most reliable)
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