Chapter 5

Question 1

1. This involves developing an overall strategy for the expected conduct and scope of the examination, the nature, extent, and timing of which vary with the size and complexity, and experience with and knowledge of the entity
   A. Audit planning
   B. Audit program
   C. Audit procedure
   D. Audit working papers

Question 2

2. Audit plans should
   Precede actions
   Be flexible
   Be cost beneficial
   A. NO YES YES
   B. YES NO YES
   C. YES YES YES
   D. NO YES NO

Question 2

3. 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 expeditiously
   A. YES YES YES YES
   B. NO YES NO YES
   C. YES NO YES YES
   D. YES NO YES NO

Question 2

4. 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

Question 3

5. In developing the overall audit plan for a new client, factor not to be considered is
   A. Materiality levels.
   B. The client’s business, including the structure of the organization and accounting system used
   C. The amount of estimated audit fee
   D. The audit risks procedures to be performed to achieve audit objectives

Question 4

6. In planning the audit engagement, the auditor should consider each of the following except
   A. matters relating to the entity’s business and the industries in which it operates
   B. the entity’s accounting policies and procedures
   C. anticipated levels of control risk and materiality
   D. the kind of opinion that is likely to be expressed

Question 5

7. A CPA is conducting the first examination of a client’s financial statements. The CPA hopes to reduce the audit work by consulting with the predecessor auditor and reviewing the
   predecessor’s working papers. This procedure is
   A. Acceptable if the client and the predecessor auditor agree to it.
   B. Acceptable if the CPA refers in the audit report to reliance upon the predecessor
   auditor’s work.
   C. Required if the CPA is to render an unmodified opinion.
   D. Unacceptable because the CPA should bring an independence viewpoint to a new
   engagement.

Question 6

8. 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 knowledge of matters that relate to the nature of the entity’s business.

Question 7

9. In performing an audit of financial statements, the auditor should have or obtain knowledge of the client’s business sufficient to
   A. makes constructive suggestions concerning improvements in internal control
   B. identify transactions and events that may affect the financial statements
   C. develop an attitude of professional scepticism
   D. assess the level of control risk

Question 8

10. Each of the following may be relevant to an auditor when obtaining knowledge about the client’s business and industry except
    A. Discussion with people within or outside the entity
    B. Publications related to the industry
    C. Visits of the entity’s premises
    D. Performing a walkthrough tests

Question 9

11. To obtain an understanding of a continuing client’s business in planning an audit, an auditor most likely would
    A. Perform test of details of transactions and balances
    B. Review prior year working papers and the permanent file for the client.
    C. Read specialized industry journals
    D. Re-evaluate the client’s internal control system

Question 10

12. Which of the following statements is correct, when obtaining understanding about the client’s business?
    A. The level of knowledge required of the auditor is ordinarily more than the level of
    knowledge possessed by management
    B. Preliminary knowledge about the entity’s industry must be obtained after
    accepting the engagement to determine whether the auditor has the necessary
    knowledge to perform the audit.
    C. Following the acceptance of the engagement, the auditor should obtain
    detailed knowledge about the client’s business preferably at the start of the engagement.
    D. For continuing engagements, the auditor may no longer obtain knowledge
    about the client’s business.

Question 11

13. Information about the client’s business appropriately assists the auditor in:
    Assessing risks and identifying potential problems
    Planning and performing the audit effectively and efficiently
    Evaluating audit evidence
    A. YES YES YES
    B. YES NO YES
    C. NO YES YES
    D. YES YES NO

Question 12

14. For initial engagements, PSA 510 does not require the auditor to obtain evidence:
    A. That the opening balances do not contain material misstatement that materially affect the current period’s financial statements.
    B. That the prior period’s ending balances have been correctly brought forward to the current period or, when appropriate, have been restated.
    C. That appropriate accounting policies are consistently applied or changes in
    accounting policies have been properly accounted for and adequately disclosed.
    D. That the prior period financial statements were audited by an independent CPA.

Question 13

15. According to PSA 320, materiality should be considered
    Determining the nature, timing and extent of audit procedures
    Evaluating the effects of misstatements.
    A. YES YES
    B. YES NO
    C. NO NO
    D. NO YES

Question 14

16. Which of the following statements is not correct about materiality?
    A. The concept of materiality recognizes that some matters are important for fair
    presentation of financial statements in conformity with acceptable financial reporting framework, while other matters are not important.
    B. An auditor considers materially for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.
    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 financial statements.

Question 15

17. 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
    D. Use the same materiality level as that used for different clients in the same
    industry

Question 16

18. In making a preliminary judgment about materiality, the auditor initially determines the aggregate (overall) level of materiality for each statement. For planning purposes, the auditor should use the
    A. Levels separately.
    B. Average of these levels
    C. Largest Aggregate Level
    D. Smallest Aggregate Level

Question 17

19. 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 and the detailed item level.
    D. the financial statement level and the account balance level.

Question 18

20. “Tolerable misstatement” 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

Question 19

21. All else being equal, as the level of materiality decreases, the amount of evidence required will:
    A. remain the same
    B. change in an unpredictable fashion
    C. decrease
    D. increase

Question 20

22. In considering materiality for planning purposes, an auditor believes that
    misstatements aggregating P 100,000 would have a material effect on an entity’s income statement, but those misstatements would have to aggregate P 200,000 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. P 100,000
    B. P 200,000
    C. P 150,000
    D. P 300,000

Question 21

23. 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 contents of the management representation letter.

Question 22

24. The concept of materiality with respect to the attest function
    A. Applies only to publicly held firms
    B. Has greater application to the standards of reporting than the other GAAS
    C. Requires that relatively more effort be directed to those assertion that more
    susceptible to misstatement
    D. Requires the auditor to make judgments as to whether misstatements affect the
    fairness of the financial statements.

Question 23

25. The relationship between materiality and risk is ordinarily
    A. Direct
    B. Parallel
    C. Inverse
    D. None

Question 24

26. When comparing level of materiality used for planning purposes and the level of materiality used for evaluating evidence, one would most likely expect
    A. The level of materiality to be always similar.
    B. The 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.

Question 25

27. When assessing materiality levels for audit purposes, the auditor should consider the
    Amount involve
    Nature of misstatement
    A. YES YES
    B. YES NO
    C. NO NO
    D. NO YES

Question 26

28. The risk that the auditor may express an incorrect opinion on the financial statements is called
    A. Inherent Risk
    B. Detection Risk
    C. Control Risk
    D. Audit Risk

Question 27

29. The susceptibility of an account to misstatements assuming no internal control is referred to as the
    A. Inherent Risk
    B. Detection Risk
    C. Control Risk
    D. Audit Risk

Question 28

30. Audit risk consists of all but the following components
    A. Inherent Risk
    B. Detection Risk
    C. Substantive Risk
    D. Control Risk

Question 29

31. For a particular assertion, control risk is the risk that:
    A. A material misstatement will occur in the accounting process.
    B. Controls will not detect a material misstatement that occurs.
    C. Audit procedures will fail to detect a weak control system.
    D. The prescribed control procedures will not be applied uniformly.

Question 30

32. The audit risk against which the auditor and those who rely on his / her opinion require reasonable protection is a combination of three separate risks at the account – balance or class-of-transactions level. The first risk is inherent risk. The second risk is that material misstatements will not be prevented by internal control. The third risk is that
    A. The auditor will reject a correct account balance as incorrect.
    B. Material misstatements that occur will not be detected by the audit
    C. The auditor will apply an inappropriate audit procedure
    D. The auditor will apply an inappropriate measure of audit materiality.

Question 31

33. When planning a financial statement audit, the auditor should assert inherent risk at the
    Financial statement level
    Account balance or transaction class level
    A. YES YES
    B. YES NO
    C. NO NO
    D. NO YES

Question 32

34. Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit function. An effective auditor will
    A. Take any means available to reduce the risk to the lowest possible level.
    B. Set the risk level between 5% and 10%
    C. Perform the audit procedures first and quantitatively set the risk level before
    forming an opinion and writing the report.
    D. Recognize that risk exists and deal with them in an appropriate manner.

Question 33

35. The audit risk model is used primarily
    A. For planning purposes in determining how much evidence to accumulate.
    B. While doing tests of controls.
    C. To determine the type of opinion to express.
    D. To evaluate the evidence which has been gathered?

Question 34

36. Inherent risk and control risk differ from detection risk in that inherent and control risks
    A. Arise from the misapplication of auditing procedures.
    B. May be assessed in quantitative or non- quantitative terms.
    C. Exist independently of the financial statement audit.
    D. Can be changed at the auditor’s discretion.

Question 35

37. Which of the following is an incorrect statement?
    A. Detection risk cannot be changed at the auditor’s discretion.
    B. If individual audit risk remains the same, detection risk bears an inverse
    relationship to inherent & control risks.
    C. The greater the inherent & control risks the auditor believes exists, the less
    detection risk that can be accepted.
    D. The auditor might make separate or combined assessments of inherent risk and control risk.

Question 36

38. 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

Question 37

39. Relationship between control risk and detection risk is ordinarily
    A. Parallel
    B. Direct
    C. Inverse
    D. Equal

Question 38

40. Which of the following conditions supports an increase in detection risk?
    A. Internal control over cash receipts is excellent
    B. Application of analytical procedures reveals a significant increase in sales
    revenue in December, the last month of the fiscal year.
    C. Internal control over shipping, billing and recording of sales revenue is weak
    D. Study of the business reveals that client recently acquired a new company in an
    unrelated industry.

Question 39

41. An auditor uses the assessed level of control risk to
    A. Evaluate the effectiveness of the entity’s internal control policies and procedures
    B. Identify transactions and account balances where inherent risk is at a high
    level.
    C. Indicate whether materiality thresholds for planning and evaluation purposes
    are sufficiently high
    D. Determine the acceptable level of detection risk for financial statements

Question 40

42. Which of the following would be considered the most conservative settings for inherent risk and control risk?
    Inherent Risk
    Control Risk
    A. 1.0 1.0
    B. 1.0 0.0
    C. 0.0 0.0
    D. 0.5 0.5

Question 41

43. What is the magnitude of audit risk if inherent risk is .50, control risk .40 and detection risk .10?
    A. 0.20
    B. 0.04
    C. 0.10
    D. 0.02

Question 42

44. An inherent risk (IR) of 40% and a control risk of (CR) of 60% affect planned detection risk and planned evidence differently than an
    A. IR of 60% and CR of 40%
    B. IR of 80% and CR of 30%
    C. IR of 100% and CR of 24%
    D. IR of 70% and CR of 30%

Question 43

45. Inherent risk is defined as the susceptibility of an account balance or class of transactions to error that could be material assuming that there were no related internal controls. Of the following conditions which one does NOT increase inherent risk?
    A. The client has entered numerous related party transactions during the year under audit
    B. Internal control over shipping, billing, and recording of sales revenue is weak
    C. The client has lost a major customer accounting for approximately 30% of annual revenue
    D. The board of directors approved a substantial bonus for the president and CEO and also approved an attractive stock option plan for themselves.

Question 44

46. According to auditing standards, the auditor uses the assessed level of control risk (together with the assessed level of inherent risk) to determine the acceptable level of detection risk for financial statement assertions. As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the
    A. Nature of substantive tests to more effective procedures
    B. Timing of substantive tests, such as performing them at year-end rather than at an interim date
    C. Extent of substantive test, such as using larger sample sizes
    D. Assurance provided by substantive tests to a lower level.

Question 45

47. As the acceptable level of detection risk decreases, an auditor may change the
    A. Timing of substantive tests by performing them at an interim date rather than at yearend
    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 level.

Question 46

48. As the acceptable level of detection risk decreases, an auditor may
    A. Reduce substantive testing by relying on the assessments of inherent risk and control risk.
    B. Postpone the planned timing of substantive tests from interim dates to the year-end
    C. Eliminate the assessed level of inherent risk from consideration as a planning factor
    D. Lower the assessed level of control risk

Question 47

49. On the basis of the audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would
    A. Decrease substantive testing.
    B. Increase inherent risk.
    C. Decrease detection risk.
    D. Increase materiality levels.

Question 48

50. Which of the following statements is not true about the auditor’s assessment of
    inherent risk when planning a financial statement audit?
    A. In developing the overall audit plan, the auditor should assess inherent risk at the
    financial statement level
    B. In developing an audit program, the auditor should assess inherent risk at the account balance or transaction class level.
    C. The auditor can make a separate or combined assessment of inherent and control risk.
    D. The auditor’s assessment of inherent risk is influenced by the condition of the client’s accounting and internal control systems.

Question 49

51. The auditor should obtain sufficient understanding of the entity and its environment, including its internal control in order to
    Identify and assess the risk of material misstatement
    Design appropriate audit procedures
    A. YES YES
    B. YES NO
    C. NO NO
    D. NO YES

Question 50

52. According to PSA 315, “Risk assessment procedures” means
    A. Identifying business risks relevant to financial reporting objectives and deciding about actions to address those risks.
    B. Obtaining understanding of entity and its environment, including its internal control
    C. Performing substantive tests and testing the operating effectiveness of the entity’s internal control
    D. Discussing with the members of the audit team the susceptibility of the entity’s
    financial statements to material misstatements.

Question 51

53. Risk assessment procedures would include all of the following except
    A. Inquiries of management and others within the entity.
    B. Analytical procedures.
    C. Observation and inspection
    D. Reperformance of client’s procedures

Question 52

54. Which of the following is incorrect about the auditor’s risk assessment procedures?
    A. Obtain understanding of the entity and its environment, including its internal
    control, is a continuous, dynamic process of gathering, updating and analysing information throughout the audit.
    B. In performing risk assessment procedures, the auditor may obtain audit evidence about classes of transactions, account balances, or disclosures and related assertions, and about the operating effectiveness of controls, even though such procedures are not specifically planned as substantive tests or tests of controls.
    C. The auditor should perform substantive procedures and tests of controls after the risk assessment procedures are performed.
    D. Obtaining understanding of internal control is not normally sufficient to serve as testing the operating effectiveness of the control.

Question 53

55. 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
    B. Variance analysis
    C. Analytical procedures
    D. Regression analysis

Question 54

56. Analytical procedures used as of risk assessment procedures performed primarily to assist the auditor in
    A. Identifying areas that may represent specific risks.
    B. Obtaining knowledge about the design of internal control.
    C. Obtaining knowledge about the operating effectiveness of the client’s internal control.
    D. Gathering corroborative evidence about the validity of an account balance.

Question 55

57. A basic premise underlying analytical procedure is that
    A. These procedures cannot replace tests 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.

Question 56

58. 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

Question 57

59. Significant unexpected differences identified by analytical procedures will usually necessitate a (an):
    A. Consistency explanatory paragraph added to the audit report
    B. Review of the internal control structure
    C. Explanation in the representation letter
    D. Auditor investigation

Question 58

60. 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 phases of the audit.

Question 59

61. Analytical procedures are used for the following purposes except
    A. To assist the auditor in planning the nature, timing and extent of other substantive procedures.
    B. As a substantive test to obtain evidential matter about particular assertion related to account balances or classes of transactions
    C. As an overall review of financial information in the final review stage of the audit.
    D. To evaluate the effectiveness of the client’s internal control.

Question 60

62. For all audits of financial statements made in accordance with PSAs, the use of
    analytical procedures is required to some extent
    In the planning stage
    As a substantive test In the review stage
    A. YES NO YES
    B. NO YES NO
    C. YES YES YES
    D. YES NO NO

Question 61

63. Analytical procedures used in planning an audit should focus on identifying:
    A. Material weakness in the internal control structure
    B. The predictability of financial data from individual transactions
    C. The various assertions that are embodied in the financial statements
    D. Areas that may represent specific risk relevant to the audit

Question 62

64. To help 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 vents 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.

Question 63

65. Analytical procedures enable the auditor to predict the balance or quantity of an item under audit, information to develop this estimate can be obtained from all of the following except
    A. Tracing transactions through the system to determine whether procedures are being applied as prescribed
    B. Comparison of financial data with data from comparable prior periods, anticipated results (e.g. budgets and forecasts), and similar data for the industry in which the entity operates
    C. Study of the relationships of elements of financial data that would be expected to
    conform to a predictable pattern based upon the entity’s experience.
    D. Study of the relationships of financial data with relevant non-financial data.

Question 64

66. An example of an analytical procedure is the comparison of
    A. Financial information with similar information regarding the industry in which the entity operates
    B. Recorded amounts of major disbursements with appropriate invoices
    C. Results of statistical sample with the expected characteristics of the actual population
    D. CIS-generated data with similar data generated by a manual accounting system

Question 65

67. Which of the following is not a typical analytical review procedure?
    A. Study of relationships of the financial information relevant non-financial information.
    B. Comparison of the financial information with similar information regarding the industry in which the entity operates.
    C. Comparisons of recorded amounts of major disbursements with appropriate invoices.
    D. Comparisons of the financial information with budgeted amounts.

Question 66

68. In developing the overall audit plan and audit program, the auditor should assess
    inherent risk at the:
    Audit Plan Audit Program
    A. Financial statement level Account balance level
    B. Account balance level financial statement level
    C. Account balance level Account balance level
    D. Financial statement level financial statement level

Question 67

70. An auditor should design the written audit program so that
    A. All material transactions will be selected for substantive testing.
    B. Substantive tests prior to the balance sheet date will be minimized.
    C. The audit procedures selected will achieve specific audit objectives.
    D. Each account balance will be tested under tests of controls or tests of transactions.

Question 67

69. In designing written audit programs, an auditor should establish specific audit
    objectives that relate primarily to the
    A. Timing of audit procedures
    B. Selected audit techniques
    C. Cost-benefit of gathering evidence
    D. Financial statements assertions

Question 68

71. An audit program should be designed for each individual audit and should include audit step 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

Question 68

72. Which of the following statements is incorrect about audit planning documentation?
    A. The audit plan and related program should nolonger be changed once the audit is started
    B. Although the precise form and content of the audit plan may vary, it should be
    sufficiently detailed to guide the development of an audit program.
    C. The audit program should set out the nature, timing and extent of planned audit
    procedures required to implement the overall audit plan.
    D. In preparing an audit program, the auditor should consider the specific assessments of inherent and control risks and the required level of assurance to be provided by substantive tests.

Question 69

73. 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.