AUDIT PLANNING AND MATERIALITY Flashcards
It involves establishing the overall audit strategy for the engagement and developing an audit plan in order to reduce audit risk to an acceptably low level
a. Reporting c. Field Work
b. Planning d. Organizing
Adequate planning of the audit work helps ensure that
* Appropriate attention is devoted to important areas
* All misstatements will be detected
* Potential problems are identified
* The work is completed efficiently and effectively
a. Yes, Yes, Yes, Yes c. Yes, No, Yes, Yes
b. No, Yes, No, Yes d. Yes, No, Yes, No
Audit plans should
* Precede actions
* Be flexible
* Be cost beneficial
a. No, Yes, Yes c. Yes, Yes, Yes
b. Yes, No, Yes d. No, Yes, No
The auditor should plan the audit work so that the audit will be performed in an effective manner. The extent of planning will vary according to the
* Size of the entity
* Complexity of the audit
* Auditor’s experience with the entity and knowledge of the business
a. Yes, Yes, Yes c. No, Yes, Yes
b. Yes, No, Yes d. No, No, No
Which of the following matters should be considered by the auditor in developing the overall audit strategy?
a. Important characteristics of the entity, its business, its financial performance and its reporting requirements including changes since the date of the prior audit
b. Conditions requiring special attention such as the existence of related parties
c. The setting of materiality level for audit purposes
d. All of the above
An audit program should be designed for each individual audit and should include audit steps and procedures to
a. Detect and eliminate all fraud
b. Increase the amount of management information available
c. Provide assurance that the objectives of the audit are met
d. Insure that only material items are audited
Which of the following matters would least likely appear in the audit program?
a. Specific procedures that will be performed
b. Specific audit objectives
c. Estimated time that will be spent in performing certain procedures
d. Documentation of the accounting and internal control systems being reviewed
The auditor shall agree the terms of the audit engagement with management or those charged with governance, as appropriate. The agreed terms shall be recorded in a/an
a. Engagement letter c. Management representation letter
b. Letter of audit inquiry d. Confirmation letter
Which of the following topics is not normally included in an engagement letter?
a. The auditors’ preliminary assessment of internal control
b. The auditors’ estimate of the fee for the engagement
c. Limitations on the scope of the engagement
d. A description of responsibility for the detection of fraud
During the initial planning phase of an audit, a CPA most likely would
a. Identify specific internal control activities that are likely to prevent fraud
b. Evaluate the reasonableness of the client’s accounting estimates
c. Discuss the timing of the audit procedures with the client’s management
d. Inquire of the client’s attorney as to whether any unrecorded claims are probable of assertion
The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the
a. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion
b. Procedures to be undertaken to discover litigation, claims, and assessments
c. Pending legal matters to be included in the inquiry of the client’s attorney
d. Timing of inventory observation procedures to be performed
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 c. Tests of control
b. Substantive tests d. Dual-purpose tests
Which of the following procedures would a CPA ordinarily perform during audit planning?
a. Obtain understanding of the client’s business and industry
b. Review the client’s bank reconciliation
c. Obtain client’s representation letter
d. Review and evaluate client’s internal control
In performing an audit of financial statements, the auditor should have or obtain knowledge of the client’s business sufficient to
a. Make constructive suggestions concerning improvements in internal control
b. Identify transactions and events that may affect the financial statements
c. Develop an attitude of professional skepticism
d. Assess the level of control risk
Which of the following factors most likely would lead a CPA to conclude that a potential audit engagement should be rejected?
a. The details of most recorded transactions are not available after a specified period of time
b. Internal control activities requiring the segregation of duties are subject to management override
c. It is unlikely that sufficient appropriate evidence is available to support an opinion on the financial statements
d. Management has a reputation for consulting with several accounting firms about significant accounting issues
Which of the following factors most likely would influence an auditor’s determination of the auditability of an entity’s financial statements?
a. The complexity of the accounting system c. The adequacy of the accounting records
b. The existence of related party transactions d. The operating effectiveness of control activities
The auditors are planning an audit engagement for a new client in a business that is unfamiliar to the auditors. Which of the following would be the most useful source of information for the auditors during the preliminary planning stage when they are trying to obtain a general understanding of audit problems that might be encountered?
a. Client manuals of accounts and charts of accounts
b. AICPA Industry Audit Guides
c. Prior year working papers of the predecessor auditors
d. Latest annual and interim financial statements issued by the client
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 materiality
b. Design special substantive tests to compensate for the lack of industry expertise
c. Engage financial experts familiar with the nature of the industry
d. Obtain a knowledge of matters that relate to the nature of the entity’s business
Before accepting an engagement to audit a new client, an auditor is required to
a. Obtain a copy of the client’s financial statements
b. Prepare a memorandum setting forth the staffing requirements and documenting the preliminary audit plan
c. Make inquiries of the predecessor auditor after obtaining the consent of the prospective client
d. Discuss the management representation letter with the client’s audit committee
Before accepting an audit engagement, a successor auditor should make specific inquiries of the predecessor auditor regarding the predecessor’s
a. Opinion of any subsequent events occurring since the predecessor’s audit report was issued
b. Understanding as to the reasons for the change of auditors
c. Awareness of the consistency in the application of GAAP between periods
d. Evaluation of all matters of continuing accounting significance
Which of the following procedures would an auditor most likely include in the initial planning of a financial statement audit?
a. Obtaining a written representation letter from the client’s management
b. Examining documents to detect illegal acts having a material effect on the financial statements
c. Considering whether the client’s accounting estimates are reasonable in the circumstances
d. Determining the extent of involvement of the client’s internal auditors
Prior to commencing fieldwork, an auditor usually discusses the general audit strategy with the client’s management. Which of the following matters do the auditor and management agree upon at this time?
a. The appropriateness of the entity’s plans for dealing with adverse economic conditions
b. The determination of the fraud risk factors that exist within the client’s operations
c. The control weaknesses to be included in the communication with those charged with governance
d. The coordination of the assistance of the client’s personnel in data preparation
Analytical procedures used in planning an audit should focus on
a. Evaluating the adequacy of evidence gathered concerning unusual balances
b. Testing individual account balances that depend on accounting estimates
c. Enhancing the auditor’s understanding of the client’s business
d. Identifying material weaknesses in the internal control structure
These consist of the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationship that are inconsistent with other relevant information or deviate from predictable amount
a. Financial statement analysis c. Analytical procedures
b. Variance analysis d. Regression analysis
A basic premise underlying analytical procedure is that
a. These procedures cannot replace test of balances and transactions
b. Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements
c. The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations
d. Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary
Which of the following is an analytical procedure that an auditor most likely would perform when planning an audit?
a. Confirming bank balances with the financial institutions
b. Scanning accounts receivable for amounts over credit limits
c. Recalculating inventory extensions of physical inventory counts
d. Comparing the current-year account balances for conformity with predictable patterns
One reason why an auditor makes an analytical review of the client’s operations is to identify
a. Improper separation of accounting and other financial duties
b. Weakness of a material nature in the system of internal accounting control
c. Unusual transactions
d. Non-compliance with prescribed control procedures
Which of the following statements about analytical procedures is incorrect?
a. Analytical procedures are required to be performed in the planning phase of the audit
b. Analytical procedures are required to be done during the testing phase of the audit
c. Analytical procedures are required to be done during the completion phase of the audit
d. Analytical procedures may be performed in the planning, testing and completion phase of the audit
Which of the following items tend to be the most predictable for purposes of analytical procedures applied as substantive tests?
a. Relationships involving balance sheet accounts
b. Transactions subject to management discretion
c. Relationships involving income statement accounts
d. Data subject to audit testing in the prior period
When planning an audit, an auditor should:
a. Consider whether the extent of substantive procedures 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
The auditors must consider materiality in planning an audit engagement. Materiality for planning purposes is
a. The auditors’ preliminary estimate of the largest amount of misstatement that would be material to any one of the client’s financial statements
b. The auditors’ preliminary estimate of the smallest amount of misstatement that would be material to any one of the client’s financial statements
c. The auditors’ preliminary estimate of the amount of misstatement that would be material to the client’s balance sheet
d. An amount that cannot be quantitatively stated since it depends on the nature of the item
Materiality should be considered by the auditor when
* Determining the nature, timing and extent of audit procedures
* Evaluating the effect of misstatements
a. Yes, Yes c. No, No
b. Yes, No d. No, Yes
In developing the preliminary level of materiality in an audit, the auditor will
a. Look to audit standards for specific materiality guidelines
b. Increase the level of materiality if fraud is suspected
c. Rely primarily on professional judgment to determine the materiality level
d. Use the same materiality level as that used for different clients in the same industry
Which of the following statements concerning materiality thresholds is incorrect?
a. Aggregate materiality thresholds are a function of the auditor’s preliminary judgments concerning audit risk
b. In general, the more misstatements the auditor expects, the higher should be the aggregate materiality threshold
c. The smallest aggregate level of errors or fraud that could be considered material to any one of the financial statements is referred to as a “materiality threshold”
d. Materiality thresholds may change between the planning and review stages of the audit. These changes may be due to quantitative and/or qualitative factors
In considering materiality for planning purposes, an auditor believes that misstatements aggregating P100,000 would have a material effect on an entity’s income statement, but those misstatements would have to aggregate P200,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate
a. P100,000 c. P150,000
b. P200,000 d. P300,000
In planning the audit, the auditor should assess materiality at two levels
a. The preliminary level and the final level
b. The company level and the divisional level
c. The account balance level and the detailed item level
d. The financial statement level and the account level
“Tolerable misstatement” is the term used to indicate materiality at the
a. Balance sheet level c. Income statement level
b. Account balance level d. Company-wide level
Which of the following statements is correct regarding the auditor’s determination of materiality?
a. The planning level of materiality should normally be the larger of the amount considered for the balance sheet versus the income statement
b. The auditors’ planning level of materiality may be disaggregated into smaller “tolerable misstatements” for the various accounts
c. Auditors may use various rules of thumb to arrive at an evaluation level of materiality, but not for determining the planning level of materiality
d. The amount used for the planning should equal that used for evaluation
All else being equal, as the level of materiality decreases, the amount of evidence required will
a. Remain the same c. Decrease
b. Change in an unpredictable fashion d. Increase
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 tests
b. The entity’s annualized interim financial statements
c. The results of the internal control questionnaire
d. The content of the management representation letter
