I75 Chapter 2: Planning and Assessing Risks Flashcards
Which of the following is correct regarding analytical procedures used in
planning?
I. Normally involves comparing the current year’s unaudited financial statements to the prior year audited statements.
II. Directs the auditor’s attention to elements of the financial statements where the risks of material misstatement are relatively higher.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
ANSWER: C
I. is correct, Analytical procedures used in planning normally involves comparing the current year’s unaudited financial statements to the prior year audited statements.
II. is correct analytical procedures used in planning normally directs the auditor’s attention to elements of the financial statements where the risks of material misstatement are relatively higher.
With regard to materiality, if the auditor revises the planned materiality level
at the financial statement level, the auditor should consider whether the
planned materiality level for which of the following should also be revised?
I. classes of transactions
II. account balances
III. disclosures
A. II and III
B. I and II
C. I II and III
D. I and III
ANSWER: C (I, II, and III)
Explanation:
If the auditor revises the planned materiality level at the financial statement level, the
auditor should consider whether the planned materiality level for particular classes
of transactions, account balances, or disclosures should be revised as well.
Which of the following explains why an auditor will perform analytical procedures in the planning stage of a financial statement audit such as comparing current financial statements to budgeted amounts?
I. To develop expectations regarding client recorded amounts.
II. To possibly reduce the assessed level of control risk.
A. Both I and II
B. Neither I nor II
C. II only
D. I only
ANSWER: D (I only)
I is correct, In planning the audit engagement, an auditor likely would compare current-year balances with budgeted balances in developing expectations for the
client recorded amounts.
II is wrong, internal control and control risk is always the wrong answer to any question about analytical procedures.
Which of the following is an analytical procedure that an auditor most likely would perform when planning a financial statement audit?
I. Examining payroll files in search of employees who were terminated.
II. Recalculating interest expense, based on bonds payable balances.
A. Both I and II
B. II only
C. Neither I nor II
D. I only
ANSWER: C (neither I or II)
I is wrong, examining payroll files in search of employees who were terminated is not an analytical procedure but a test of details.
II. is wrong, recalculating interest expense, based on bonds payable balances is an analytical procedure done later in the audit, in the evidence gathering stage
Which of the following is an analytical procedure that an
auditor most likely would perform when planning a
financial statement audit?
I. Examining payroll files in search of employees who were
terminated.
II. Recalculating interest expense, based on bonds payable
balances.
A. Both I and II
B. II only
C. Neither I nor II
D. I only
ANSWER: C
Explanation:
I is wrong, examining payroll files in search of employees who were terminated is not an analytical procedure but a test of details.
II. is wrong, recalculating interest expense, based on bonds payable balances is an analytical procedure done later in the audit, in the evidence gathering stage
Decisions about which of the following is determined in the
planning stage of a financial statement audit?
I. Hiring a specialist to corroborate client estimates
regarding the percentage completed of a building.
II. Using the client’s internal auditor’s documentation to
gain an understanding of the controls designed in the
revenue cycle.
A. II only
B. Neither I nor II
C. Both I and II
D. I only
ANSWER: C
Explanation:
I.is correct, The decision to hire a specialist to corroborate client estimates regarding the percentage completed of a building would be made in the planning stage of an audit although the specialist would likely not be used until the evidence gathering stage.
II. is correct, The decision to use the client’s internal auditor’s
documentation to gain an understanding of the controls designed in the revenue cycle would be made in the planning stage although the auditor would likely use that documentation in the internal control stage.
TRUE OR FALSE
Audit risk is the risk of giving the wrong opinion on the
financial statements at the conclusion of the audit.
TRUE
TRUE OR FALSE
Audit risk is made up of the risk of material misstatement
and detection risk..
TRUE
Reducing detection risk would be consistent with which of
the following?
I. Reducing sample sizes for planned substantive tests.
II. Increasing the reliance on analytical procedures in the
evidence gathering stage.
A. I only
B. Both I and II
C. II only
D. Neither I nor II
ANSWER: D
Explanation:
I is wrong, reducing detection risk would be consistent with
increasing sample sizes for planned substantive tests.
II is wrong, reducing detection risk would be consistent decreasing the reliance on analytical procedures in the evidence gathering stage.
With regard to data analytics, in the ETL process, data
harvesting would take place in which of the following
steps?
A. Transform
B. Extract and Load
C. Extract
D. Load
ANSWER: C
Explanation:
Data harvesting is another term for data extraction and would take place in the first step of ETL. The steps in ETL are extract, followed by transform and finally, load
Which of the following risks are assessed by the auditor?
I. Inherent risk
II. Detection risk
A. II only
B. Neither I nor II
C. Both I and II
D. I only
ANSWER: D
Explanation:
I is correct, Inherent risk is assessed by the auditor.
I is wrong the auditor does not assess detection risk but rather takes into account the auditor’s assessment of inherent and control risk when deciding on substantive testing.
All of the following would likely be included in an audit
planning checklist except?
A.Procedures to evaluate competence and objectivity of client internal auditors.
B. The extent of expected involvement of other independent auditors or internal auditors.
C. A discussion of the risk of the risk of misstatement due to fraud for each assertion for each account with the audit committee.
D. That the audit firm considered financial statement items likely to require adjustment.
ANSWER: C
Explanation:
Although discussions with management, the board of directors, and the audit committee will be held on fraud, the details at the assertion level for each account will not usually be discussed. The extent of expected involvement of other independent auditors or internal auditors would be expected in a planning checklist. Procedures to
evaluate competence and objectivity of client internal auditors would be expected in a planning checklist. The planning checklist would also include that the audit firm considered financial statement items likely
to require adjustment.
Which of the following is correct with regard to analytical
procedures performed in the planning stage of a financial
statement audit?
I. Required as part of the auditor’s risk assessment
procedures.
II. Assists the auditor in understanding the entity and its
environment.
A. I only
B. Neither I nor II
C. Both I and II
D. II only
ANSWER: C
The auditor’s analytical procedures performed in planning may assist the auditor in understanding the entity and its environment and identify specific risks relevant to the audit.
