Audit Planning Quesion Bank

Question 1

Factors to consider when determining timing of audit procedures.

Answer 1

1. Chronological sequence of the audit procedures
2. The size of client
3. The number of interim visit necessary to study the control and internal controls
4. Compliance procedures should cover the entire period under review
5. Client’s deadline
6. The timing with information should be prepared by the client already
7. The times when audit visit would be convenient for the client
8. The necessity to perform various tests simultaneously
9. The necessity for element of surprise
10. The scheduling of the audit staff in order that all clients can be serviced

Question 2

What information should be taken from the previous years audit file for current years audit?

Answer 2

1. Audit planning memorandum
   - planned materiality
   - inherent risk factors
   - audit approach followed
2. Problems anticipated
3. Unadjusted differences and their impact
4. Various types of adjustments made
5. The actual time and costs compared to budgeted time and cost and reason for fluctuation
6. The letter written to management which sets out weaknesses, recommendations
7. Type of business
8. Organizational structure
9. Accounting policy
10. Internal control system

Question 3

Explain how a thorough understanding of client’s business can assist the auditor in performing his audit?

Answer 3

It helps to

• evaluate audit risk and materiality and to identify problems
• plan the audit effectively and conduct it
• evaluate audit evidence
• giving a better service to clients

Question 4

List the possible sources from which auditor can obtain more information regarding the external factors affecting the client.

Answer 4

1. Trade magazine and newspapers
2. Specialist and analysts reports on the industry
3. Information provided by branches of your own firm
4. Relevant publications including industry guidelines and newsletters
5. Laws and regulations
6. Speak to legal professionals
7. Accounting standards

Question 5

List the most important factors which you would consider in order to determine the efficiency of management control including computer operations.

Answer 5

1. Managements commitment to security
2. Whether size of accounting department is sufficient for the the functions that it performs
3. Whether security is reviewed regularly
4. Badly organized accounting department
   - shortage in staff
   - high turnover
   - struggles with internal control problem

Question 6

Who is responsible for detecting and preventing fraud?

Answer 6

The responsibility of detecting and preventing fraud is that of those in charged with governance of the entity and with management. The auditor is not responsible for preventing fraud and cannot be ma responsible for it.

Question 7

Name three procedures that an auditor can perform in terms of consideration of laws and regulations in the audit of financial statements.

Answer 7

1. Use the existing knowledge of the entity’s industry and business
2. Enquire of management concerning the entity’s policies and procedures regarding compliance with laws and regulation
3. Discuss legal and regulatory framework with auditors

Question 8

Name two categories of financial statement assertions about account balances.

Answer 8

1. Completeness
2. Existence
3. Valuation
4. Rights and obligations
5. Presentation and disclosure

Question 9

Name the factors that affects the nature, timing and extent of audit procedures.

Answer 9

1. The size and complexity of entity and its accounting system
2. Materiality consideration
3. Types of internal controls
4. Nature of entity’s documentation of specific internal controls
5. Inherent risk assessment

Question 10

Discuss the the factors to consider and procedures performed prior to acceptance as auditor.

Answer 10

1. Pre engagement activities
   - client investigation
   - independence of auditor
   - nature of business and integrity of management
   - communication with previous auditor
   - determine whether the previous auditor has been informed of our appointment
   - determine whether management has given permission to communicate with previous auditor
   - determine clients financial ability to pay audit fee
2. Determine skill and competence required
3. Establish terms of engagement

Question 11

What are the percentages for materiality for the following...
Turnover
Gross profit
Net profit
Total assets
Total equity

Answer 11

Turnover = 1/2 to 1 %
Gross profit = 1 to 2 %
Net profit = 5 to 10%
Total asset = 1 to 2 %
Total equity = 2 to 5 %

Question 12

Name the 5 components of good internal control.

Answer 12

1. Control environment
   - integrity and ethical values
2. Risk assessment
   - management philosophy and operating style
3. Information and communication
   - system have clear audit trails
4. Control activities
   - management ID, evaluate and manage risk
5. Monitor deviations form actual

Question 13

Identify the sources from which auditor may obtain a knowledge of the entity.

Answer 13

1. Previous experience with entity and its industry
2. Discussion with ppl within the industry
3. Discuss with internal audit personnel
4. Publication relating to industry
5. Legislation and regulations significant to the entity

Question 14

Discuss the risks

Answer 14

1. Inherent risk = susceptibility of account balance or class of transaction to misstatement that could be material individually or in aggregate with misstatements in other balances or classes.
2. Control risk = risk that material misstatements will occur in account balances or classes of transactions and that could be material that will not be prevented or detected and corrected by accounting and internal control system
   Inherent risk and control risk together has effect on detection risk. If the overall assessment of control and inherent risk is high detection risk must be set as low in order to reduce overall audit risk to an acceptable level.