PLANNING OF AN AUDIT

Question 1

What are the Benefits of Audit
Planning?

Answer 1

Planning helps to:
1. Complete the engagement effectively and efficiently
2. Identify and resolve potential problems on timely basis
3. Pay attention to important areas of audit
4. Assist in selection of appropriate team
5. Perform direction, supervision and review of engagement team
6. Coordinate on timely basis with component auditor or experts

Question 2

What is an Audit Plan?

Answer 2

Audit plan includes nature, timing and extent of audit procedures to be
performed by engagement team members on each area of the financial
statements.

Question 3

What is Interim Audit?

Answer 3

An interim audit is that part of audit which takes place before the year end.

Question 4

What is Final Audit?

Answer 4

Final audit takes place after the year-end and concludes with the auditor
forming and expressing an opinion on financial statements for the whole year

Question 5

What are the Benchmarks of
Materiality?

Answer 5

1. Net Profit
2. Total Expenses
3. Total Revenue
4. Net Assets
5. Net Current Assets

Question 5

What is Performance Materiality

Answer 5

Performance materiality is an amount less than the level of overall materiality.
It is used to reduce the probability that the aggregate of uncorrected and
undetected misstatements exceeds materiality for the financial statements as
a whole

Question 6

What is Transaction-Based Audit?

Answer 6

It is an approach for an audit under which no reliance is placed upon entity’s
internal controls. The auditor solely performs test of details

Question 7

What is System-Based Audit?

Answer 7

If the internal controls are assessed as effective in the walk-through tests, the
auditor may rely on the internal controls and perform test of controls to
determine the level of substantive testing. This is a system-based audit

Question 8

What are Walk-Through Tests?

Answer 8

It is a procedure performed by the auditor which traces a transaction step-by-
step through the accounting system from its inception to the final disposition

Question 9

What is Inherent Risk?

Answer 9

It is the susceptibility of an assertion to a misstatement that could be material
before considering any related controls.

Question 10

What is Control Risk?

Answer 10

It is the risk that entity’s controls may not prevent, detect or correct material
misstatements

Question 11

What is Detection Risk?

Answer 11

It is the risk that procedures performed by auditors will fail to detect a material
misstatement

Question 12

What is Audit Risk?

Answer 12

It is the risk that the auditor will express an inappropriate opinion

Question 13

What is a Not-for-Profit
Organization?

Answer 13

It is an organization with an objective to provide services to the society. It does
not generate profits and no part of its income is distributed to its members,
directors or officers

Question 14

What are Internal Controls?

Answer 14

Internal controls are processes and procedures implemented by the
management to ensure achievement of an organization’s objectives in
operational effectiveness and efficiency, reliable financial reporting, and
compliance with laws and regulations

Question 15

What are Internal Controls?

Answer 15

Internal controls are processes and procedures implemented by the
management to ensure achievement of an organization’s objectives in
operational effectiveness and efficiency, reliable financial reporting, and
compliance with laws and regulations

Question 16

What are the Limitations of Internal
Controls?

Answer 16

1. Breakdown caused by human error
2. Management override of controls and collusion
3. Lack of segregation of duties in small entities
4. Non routine transactions are not subject to internal controls
5. Judgements involved in implementation may be faulty

Question 17

What are the Components of Internal
Controls?

Answer 17

1. Control Environment
2. Information Systems
3. Entity’s Risk Assessment Process
4. Control Activities (Authorization – Performance Reviews – Information
   Processing Controls – Physical Controls – Segregation of Duties)
5. Monitoring of Controls

Question 18

What is Segregation of Duties?

Answer 18

Segregation of duties is division of work between multiple workers to
reduce the risk of error and fraud

Question 19

What is Management Letter?

Answer 19

It is a document prepared by the auditor to communicate significant
deficiencies in internal controls to the management

Question 20

What is an Audit Trail?

Answer 20

An audit trail is the ability of users to trace a transaction through all of its
processing stages

Question 21

What is a System Log?

Answer 21

A system log is a record of events that take place in performance of system.

Question 22

What is Encryption?

Answer 22

Encryption is the conversion of data into coded form using a program to
make it unreadable to everyone except its intended users

Question 23

Preventive Controls

Answer 23

Controls designed to stop errors or irregularities from occurring.
Examples: segregation of duties, authorization, restricting access through
passwords/firewalls

Question 24

Detective Controls

Answer 24

Controls designed to identify errors or irregularities that may occur.
Examples: reconciliations, periodic audits, exception reports, review of
system logs

Question 25

Corrective Controls

Answer 25

Controls designed to correct errors or irregularities that have been
detected.
Examples: backup and recovery procedures, disciplinary mechanisms

Question 26

What is Check Digit?

Answer 26

Check digit is a validation check on key numerical codes. It is calculated from
the original data and added to the end

Question 27

What is Audit Software?

Answer 27

It is a computer program used by auditors to extract and interrogate
financial information in client’s IT system for use in audit work.

Question 28

What is Test Data?

Answer 28

It is a set of dummy transactions developed by an auditor and processed by
the client’s IT system