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AudTheo > Planning an Audit of Financial Statements > Flashcards

Planning an Audit of Financial Statements Flashcards

1
Q

[True/False]

Audit effectiveness is the primary objective of the auditor in engagement planning which results to the utilization of least amount of resources.

A

True

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2
Q

[True/False]

Audit planning helps the auditor properly organize and manage the audit engagement.

A

True

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3
Q

[True/False]

For recurring audits, members of the previous year’s engagement team are advised to participate in the planning of the current year audit.

A

True

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4
Q

[True/False]

Audit planning helps in achieving effective and efficient audits which must be completed before the performance of further audit procedures.

A

True

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5
Q

[True/False]

The audit plan sets the scope, timing and direction of the audit which leads to the establishment of the overall audit strategy.

A

False, the OVERALL AUDIT STRATEGY sets the scope, timing and direction of the audit which leads to the establishment of the AUDIT PLAN.

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6
Q

[True/False]

Risk assessment procedures enable the auditor to understand the entity and its environment and identify and assess risks of material misstatement.

A

True

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7
Q

[True/False]

Risk assessment procedures help in specifically identifying the applicable further audit procedures to respond to identified risk.

A

True

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8
Q

[True/False]

Inquiry consists of seeking both financial and non-financial information from knowledgeable persons within the entity.

A

False, within OR outside the entity

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9
Q

[True/False]

Observation consists of looking at a process or audit procedure.

A

False, observation consists of looking at a process or audit procedure BEING PERFORMED BY OTHERS.

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10
Q

[True/False]

Physical verification of the entity’s premises and plant facilities is considered an inspection procedure.

A

True

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11
Q

[True/False]

Analytical procedures enable the auditor to conclude if the fluctuations and relationships in the entity’s financial information make sense.

A

True

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12
Q

[True/False]

Industry benchmarks or averages may be used to develop expectations regarding financial statements.

A

True

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13
Q

[True/False]

Preliminary analytical review is only required for new or unusual business transactions entered by the entity during the period under audit.

A

True

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14
Q

[True/False]

Only planning and concluding analytical review are required to be performed in an audit.

A

False

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15
Q

[True/False]

Materiality is an absolute concept as prescribed by the engagement standards.

A

False, materiality is a RELATIVE rather than absolute concept

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16
Q

[True/False]

Misstatements, including omissions, are considered material if individually they could reasonably be expected to influence the economic decisions of users.

A

False, misstatements, including omissions, are considered material if individually OR IN THE AGGREGATE, they could reasonably be expected to influence the economic decisions of users

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17
Q

[True/False]

The determination of materiality is a mathematical exercise with a prescribed formula that differs depending on the industry of the entity.

A

False, the determination of materiality is NOT a mathematical exercise with a prescribed formula that differs depending on the industry of the entity

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18
Q

[True/False]

The auditor should revise the overall materiality should he become aware of information during the audit that would lead to a different amount.

A

True

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19
Q

[True/False]

The identification and assessment of risks of material misstatements are both done at the financial statement and assertion levels.

A

True

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20
Q

[True/False]

Detection risk is determined and controlled by the auditor.

A

True

21
Q

[True/False]

The results of preliminary engagement activities are also considered when establishing the overall audit strategy.

A

True

22
Q

[True/False]

When the work of an expert is involved in the audit, the auditor’s responsibility for the audit opinion is shared with the expert.

A

False, the auditor’s responsibility is not reduced by the auditor’s use of the work of an auditor’s expert

23
Q

[True/False]

To comply with ethical requirements, the current year auditor should communicate with the previous auditor for initial engagements.

A

True

24
Q

[True/False]

Establishing overall audit strategy and plan for audits of small entities need to be complex but not time consuming.

A

False, it DOES NOT need to be complex or time-consuming

25
Q

Which of the following statement is/are correct?

I. The client should plan the audit work so that the audit will be performed in an effective manner.
II. The auditor should conduct the audit with an attitude of professional skepticism.
III. The auditor should develop and document an overall audit plan describing the scope and conduct of the audit.

A) Only one statement is correct.
B) Only two statements are correct.
C) All statements are correct.
D) All statements are incorrect.

A

B) Only two statements are correct.

26
Q

Adequate planning of the audit work helps the auditor of accomplishing the following objectives, except

A) gathering of all corroborating audit evidence
B) ensuring that appropriate attention is devoted to important areas of the audit
C) identifying the areas that need a service of an expert
D) the audit work is completed efficiently

A

A) gathering of all corroborating audit evidence

27
Q

The extent of planning will vary according to any of the following, except

A) size of the audit client
B) auditor’s experience with the entity and knowledge of the business
C) the nature and complexity of the audit engagement
D) the assessed level of control risk

A

D) the assessed level of control risk

28
Q
  1. Which of the following statements is incorrect?

A) The auditor should plan the audit so that the engagement will be performed in an effective manner.
B) Planning an audit involves establishing the overall audit strategy for the engagement and developing the audit plan, in order to reduce audit risk to an acceptably low level.
C) Planning involves the engagement partner and other key members of the engagement team to benefit from their experience and insight and to enhance the effectiveness and efficiency of the planning process.
D) Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after(or in connection with) the completion of the previous audit and continues until the finalization of the audit program.

A

D) Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after(or in connection with) the completion of the previous audit and continues until the finalization of the audit program.

29
Q

The auditors plan should

Precede Action, Be Static, Be Cost-beneficial

A) Yes, Yes, Yes
B) No, No, Yes
C) Yes, No, Yes
D) Yes, No, No

A

C) Yes, No, Yes

30
Q

Which of the following statements is/are correct?

I. Obtaining knowledge of the entity business is an important part of the planning the audit work.
II. The auditor’s knowledge of the entity’s business assists in the identification of events, transactions and practices which may have a material effect on the financial statements.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Both statements are incorrect.

A

C) Both statements are correct.

31
Q

Which of the following statements is/are correct?

I. The overall audit plan and the audit program should not be revised during the course of the audit.
II. The auditor should develop and document an audit program setting out the nature, timing and extent of
planned audit procedures required to implement the overall audit plan.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Both statements are incorrect.

A

B) Only statement II is correct.

32
Q

Which of the following statements is/are correct?

I. According to PSA 300, the auditor may discuss elements of planning with those charged with governance
and the entity’s management.
II. The audit plan sets the scope, timing and direction of the audit guides the development of the more detailed
overall audit strategy.
III. The overall audit strategy is more detailed than the audit plan and includes the nature, timing and extent of
audit procedures to be performed engagement team members to obtain sufficient appropriate audit evidence to reduce
audit risk to an acceptably low level.

A) Only 1 statement is correct.
B) Only 2 statements are correct.
C) All statements are correct.
D) All statements are incorrect.

A

A) Only 1 statement is correct.

33
Q

Which of the following is least likely considered by the CPA when he makes an overall audit plan?

A) Identification of complex accounting areas including those involving accounting estimates.
B) The effect of information technology on the audit.
C) The content of the representation letters.
D) The nature and timing of reports and other communication with the entity that are expected under the engagement.

A

C) The content of the representation letters.

34
Q

In designing audit programs, an auditor should establish specific audit objectives that related primarily to the

A) selected audit techniques
B) timing of audit procedures
C) financial statement assertions
D) cost-benefit gathering evidence

A

C) financial statement assertions

35
Q

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 the related parties
C) The setting of materiality level for audit purposes
D) All of the above

A

D) All of the above

36
Q

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.

A

D) timing of inventory observation procedures to be performed.

37
Q

Which of the following is most likely to require special planning considerations related to asset valuation?

A) Inventory is comprised of diamond rings.
B) The client has recently purchased an expensive copy machine.
C) Assets costing less than Php 25, 000 are expensed even when the expected life exceeds one year.
D) Accelerated depreciation methods are used for amortizing the costs of factory equipment.

A

A) Inventory is comprised of diamond rings.

38
Q

The auditor should document the overall audit strategy and the audit plan, including significant changes made during the audit engagement. Which of the following statements on documentation is incorrect?

A) Documentation of the overall audit strategy may be made in the form of a memorandum that contains key decisions regarding the overall scope, timing and conduct of the audit.
B) The auditor may use standard audit programs or audit completion checklists, but such programs and checklists need to be tailored to the particular client.
C) The auditor’s documentation of any significant changes to the originally planned overall audit strategy and to the detailed audit plan need not include the reasons for the significant changes.
D) The form and extent of documentation depend on such matters as the size and complexity of the entity, materiality, the extent of other documentation, and the circumstances of the specific engagement.

A

C) The auditor’s documentation of any significant changes to the originally planned overall audit strategy and to the detailed audit plan need not include the reasons for the significant changes.

39
Q

In developing an overall audit strategy, an auditor should consider

A) whether the allowance for sampling risk exceeds the achieved upper precision limit.
B) findings from substantive tests performed at interim dates.
C) whether the inquiry of the client’s attorney identifies any litigation, claims, or assessments not disclosed in the financial statements.
D) preliminary evaluations of materiality, audit risk, and internal control.

A

D) preliminary evaluations of materiality, audit risk, and internal control.

40
Q

Assertions used by the auditor fall into the following categories, except

A) assertions about the faithful representations
B) assertions about account balances
C) assertions about classes of transactions and events
D) assertions about presentation and disclosure

A

A) assertions about the faithful representations

41
Q

This serves as the set of instructions to assistants involved in the audit and as a means to control and record the proper execution of the work of the personnel involved in the service.

A) Audit procedures
B) Audit plan
C) Audit program
D) Audit risk model

A

C) Audit program

42
Q

The 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 either tests of controls or tests of transactions.

A

C) the audit procedures selected will achieve specific audit objectives.

43
Q

Audit procedures may be classified as risk assessment procedures and further audit procedures. Which of the following best describes risk assessment procedures?

A) These procedures test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.
B) These procedures are used detect material misstatements at the assertion level.
C) These are procedures for obtaining an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the financial statement and assertion levels.
D) These procedures include tests of details of classes of transactions, account balances, and disclosures and
analytical procedures.

A

C) These are procedures for obtaining an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the financial statement and assertion levels.

44
Q

One of the primary uses of an audit program is to

A) provide for a standardized approach to the audit engagement.
B) serve as a tool for planning, directing and controlling the audit work.
C) document an auditor’s understanding of the internal control.
D) delineate the audit risk accepted by the auditor.

A

B) serve as a tool for planning, directing and controlling the audit work.

45
Q

The audit program should contain the following, except

A) audit objective
B) time budget for the various audit areas
C) set of planned audit procedures
D) the combined assessed level of inherent and control risk

A

D) the combined assessed level of inherent and control risk

46
Q

The program should set out the

Nature of Procedures, Timing of Planned Procedures, Extent of Planned Procedures

A) Yes, Yes, Yes
B) No, No, Yes
C) Yes, No, Yes
D) Yes, No, No

A

A) Yes, Yes, Yes

47
Q

The audit program usually cannot be finalized until the

A) consideration of the entity’s internal control has been completed.
B) engagement letter has been communicated to the audit committee.
C) reportable conditions have been communicated to the audit committee.
D) search for unrecorded liabilities has been performed and documented.

A

A) consideration of the entity’s internal control has been completed.

48
Q

Which of the following is/are correct?

I. The auditor shall perform risk assessment procedures to provide a basis for the identification and assessment of risk of material misstatement at financial statement and assertion levels.
II. Risk assessment procedures by themselves provide sufficient appropriate evidence on which to base the opinion.

A) Only statement I is correct.
B) Only statement II is correct.
C) Both statements are correct.
D) Both statements are incorrect.

A

A) Only statement I is correct.

49
Q

In performing an audit of financial statements, the auditor should obtain a sufficient knowledge of a client’s business and industry to

A) develop an attitude of professional skepticism concerning management’s financial statements assertions.
B) make constructive suggestion concerning improvements causes the financial statements taken as a whole to be materially misstated.
C) evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated.
D) understand the events and transactions that may have an effect on the client’s financial statements.

A

D) understand the events and transactions that may have an effect on the client’s financial statements.

AudTheo (3 decks)

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