5) Audit Planning

The development of a general strategy and a detailed approach for the expected nature, timing, and extent of audit refers to:

a. Supervision
b. Audit procedures
c. Directing
d. Planning

d. Planning

The auditor should consider the nature, extent, and timing of the work to be performed and should prepare a written audit program for every audit. Which audit standard is most closely related to this requirement?

a. The audit is to be performed by a person or persons having adequate technical training and proficiency as an auditor.

b. In all matters relating to the assignment, an independent mental attitude is to be maintained by the auditor(s).

c. Due professional care is to be exercised in the planning and performance of the audit and preparation of the report.

d. The work is to be adequately planned and assistants, if any, are to be properly supervised.

d. The work is to be adequately planned and assistants, if any, are to be properly supervised.

Which of the following would a successor auditor normally perform after acceptance of an audit client?

a. Inquiry of predecessor auditor regarding the client.

b. Review the SEC filings of the client.

c. Inquiry of bankers regarding the client.

d. Review of predecessor auditor working papers.

d. Review of predecessor auditor working papers.

To obtain an understanding of a continuing client's business in planning an audit, an auditor most likely would

a. Perform tests 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. Reevaluate client's internal control environment.

b. Review prior-year working papers and the permanent file for the client.

Which of the following is required documentation in an audit in accordance with generally accepted auditing standards?

a. A flowchart or narrative of the information system describing the recording and classification of transactions for financial reporting.

b. An audit program setting forth in detail the procedures necessary to accomplish the engagement's objectives.

c. A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel.

d. An internal control questionnaire identifying policies and procedures that assure specific objectives will be achieved.

b. An audit program setting forth in detail the procedures necessary to accomplish the engagement's objectives.

Which of the following procedures would an auditor most likely perform in planning a financial statement audit?

a. Inquiring of the client's legal counsel concerning pending litigation.

b. Comparing the financial statements to anticipated results.

c. Examining computer-generated exception reports to verify the effectiveness of internal controls.

d. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

b. Comparing the financial statements to anticipated results.

Analytical procedures used in planning an audit should focus on

a. Reducing the scope of tests of controls and substantive tests.

b. Providing assurance that potential material misstatements will be identified.

c. Enhancing the auditor's understanding of the client's business.

d. Assessing the adequacy of the available evidential matter.

c. Enhancing the auditor's understanding of the client's business.

Analytical procedures, which means the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationships that are inconsistent with other relevant information or which deviate from predicted amounts, are not required to be applied

a. At the planning stage of the audit.

b. Overall review stage of the audit.

c. As substantive procedures.

d. None of the above.

c. As substantive procedures.

Which of the following statements is correct concerning analytical procedures?

a. Analytical procedures usually involve comparisons of ratios developed from recorded amounts to assertions developed by management.

b. Analytical procedures used in planning an audit generally use data aggregated at a high level.

c. Analytical procedures can replace tests of controls in gathering evidence to support the assessed level of control risk.

d. Analytical procedures are more efficient, but not more effective, than tests of details and transactions.

b. Analytical procedures used in planning an audit generally use data aggregated at a high level.

Which of the following is an effective audit planning and control procedure that helps prevent misunderstandings and inefficient use of audit personnel?

a. Make copies, for inclusion in the working papers, of those client supporting documents examined by the auditor.

b. Provide the client with copies of the audit programs to be used during the audit.

c. Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information.

d. Arrange to have the auditor prepare and post any necessary adjusting or reclassification entries prior to final closing.

c. Arrange a preliminary conference with the client to discuss audit objectives, fees, timing, and other information.

Which of the following is an aspect of scheduling and controlling the audit engagement?

a. Including in the audit program a column for estimated and actual time.

b. Performing audit work only after the client's books of account have been closed for the period under examination.

c. Writing a conclusion in individual working papers indicating how the results of the audit will affect the auditor's report.

d. Including in the engagement letter an estimate of the minimum and maximum audit fee.

a. Including in the audit program a column for estimated and actual time.

Which of the following is an engagement attribute for an audit of an entity that processes most of its financial data in electronic form without any paper documentation?

a. Discrete phases of planning, interim, and year-end field work.

b. Increased effort to search for evidence of management fraud.

c. Performance of audit tests on a continuous basis.

d. Increased emphasis on the completeness assertion.

c. Performance of audit tests on a continuous basis.

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 GAAP, while other matters are not important.

b. An auditor considers materiality 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.

b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements.

The risk that the assertion contains material misstatements that, when aggregated with misstatements in other assertions, could make the entire financial statements materially misstated is

a. Individual audit risk.

b. Inherent risk.

c. Control risk.

d. Detection risk.

a. Individual audit risk.

Incremental risk is the increased risk that errors may not be detected at the balance sheet date because

a. Audit procedures were performed at an interim date.

b. Inherent risk was assessed too low.

c. Analytical procedures were not performed.

d. Detection risk was set too high a level.

a. Audit procedures were performed at an interim date.

Adequate planning of the audit work helps the auditor in 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. Gathering of all corroborating audit evidence.

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.

d. The assessed level of control risk.

Which of the following is least likely considered by the auditor in developing the overall audit plan?

a. Understanding of the accounting and internal control systems.
b. Relevant risk and materiality.
c. The involvement of other auditors in the audit of major components of financial statements.
d. The general level of competence of audit assistants.

d. The general level of competence of audit assistants.

Which of the following is not considered by the CPA when making an overall audit plan?

a. Identification of complex accounting areas including those involving accounting estimates.
b. The information technology used by the client.
c. The content of the representation letters.
d. The nature and timing of reports or other communication with the entity that are expected under the engagement.

c. The content of the representation letters.

Audit plan should

Precede Action, Be Fixed, Be Cost beneficial

A. Yes, Yes, Yes

B. No, No, Yes

C. Yes, No, Yes

D. No, Yes, Yes

C. Yes, No, Yes

Which of the following least likely affect the form and content of the overall audit plan?

a. Complexity of the audit engagement.
b. Methodology and technology used by the auditor.
c. The entity's form of business organization.
d. The size of the entity.

c. The entity's form of business organization.

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.

d. The combined assessed level of inherent and control risk.

Which of the following will most likely help the auditor identify and understand the events, transactions, and practices of the audit client?

a. Obtaining sufficient knowledge of the client's business.
b. Understanding accounting and internal control.
c. Testing control policies and procedures.
d. Obtaining a representation letter from management.

a. Obtaining sufficient knowledge of the client's business.

The auditor should have or obtain knowledge of the client's business sufficient to

a. Evaluate whether the financial statements are materially misstated.
b. Document material weaknesses in accounting and internal control systems.
c. Identify and understand events, transactions, and practices that may have an effect on the financial statements.
d. Have an overall evaluation of whether financial assertions are fairly presented.

c. Identify and understand events, transactions, and practices that may have an effect on the financial statements.

The auditor obtains knowledge of the client's business
Prior to acceptance of engagement

Planning stage of the audit

Testing of transactions stage

a. No, Yes, No

b. No, Yes, Yes

c. Yes, Yes, Yes

d. Yes, No, Yes

c. Yes, Yes, Yes

Understanding the business and using this information appropriately assists the auditor in, except

a. Deciding whether to do tests of controls.
b. Evaluating audit evidence.
c. Assessing risks and identifying potential problems.
d. Planning and performing the audit effectively and efficiently.

a. Deciding whether to do tests of controls.

Which of the following is the ultimate concern of the knowledge about the business?

a. Consideration of how it affects the financial statements taken as a whole.
b. Assists the auditor in enforcing quality control procedures.
c. To assure that sufficient audit evidence is obtained.
d. It assists in determining the type of audit report to be issued.

a. Consideration of how it affects the financial statements taken as a whole.

A knowledge of the business is a frame of reference within which the auditor exercises professional judgment. This assists the auditor in carrying out the following objectives, except:

a. Assessing risks and identifying problems.
b. Evaluating audit evidence.
c. Determining the audit opinion to be expressed.
d. Planning and performing the audit effectively and efficiently.

c. Determining the audit opinion to be expressed.

Throughout the course of the audit, the auditors make judgments about many matters where knowledge of the business is important. These procedures do not include:

a. Evaluating accounting estimates and management representations.
b. Identifying related parties and related party transactions.
c. Assessing inherent and control risks.
d. Assessing the appropriateness of using statistical sampling instead of judgmental sampling.

d. Assessing the appropriateness of using statistical sampling instead of judgmental sampling.

Which of the following factors is inappropriately relevant to management's assessment of the going concern assumption?

a. The degree of uncertainty associated with the outcome of an event or condition decreases significantly the further into the future of judgment being made about the outcome of an event or condition.

b. Any judgment about the future is based on information available at the time at which the judgment is made.

c. The size and complexity of the entity, and the nature and conditions of its business affect the judgment regarding the outcome of events or conditions.

d. Subsequent events can contradict a judgment which was reasonable at the time it was made.

a. The degree of uncertainty associated with the outcome of an event or condition decreases significantly the further into the future of judgment being made about the outcome of an event or condition.

Which of the following may not cast significant doubt about the going concern assumption of an entity?

a. The entity heavily used equity financing for investment in permanent assets.

b. Non-compliance with capital or other statutory requirements.

c. Pending legal or regulatory proceedings against the entity that may, if successful, result in claims that are unlikely to be satisfied.

d. Changes in legislation or government policy expected to adversely affect the entity.

a. The entity heavily used equity financing for investment in permanent assets.

When events or conditions have been identified which may cast significant doubt on the entity's ability to continue as a going concern, the auditor should

a. Review management's plans for future actions based on its going concern assessment.

b. Gather sufficient appropriate audit evidence to confirm or dispel whether or not a material uncertainty exists through carrying out procedures considered necessary, including considering the effect of any plans of management and other mitigating factors.

c. Seek written representations from management regarding its plans for future action.

d. All of the above.

d. All of the above.

Which of the following proposed actions may mostly mitigate the going concern problem of an entity?

a. Rescheduling of loan payments.

b. More vigorous business expansion.

c. Acquiring asset replacement using short-term loans.

d. Increasing the amount of cash dividends to be paid.

a. Rescheduling of loan payments.

The following are related to the auditor's responsibility to assess the ability of the company to continue as a going concern:

I. The auditor should consider the appropriateness of management's use of the going concern assumption in the preparation of the financial statements.

II. The auditor is to consider whether there are material uncertainties about the entity's ability to continue as a going concern that need to be disclosed in the financial statements.

III. The absence of any reference to going concern uncertainty in the auditor's report is viewed as a guarantee as to the entity's ability to continue as a going concern.

Which of the foregoing inappropriately describe(s) the auditor's responsibility?

a. I only

b. I and II only

c. II only

d. III only

d. III only

The auditor considers events and conditions relating to the going concern assumption during the planning stage in order to

a. Help management do actions that may mitigate its going concern problems.

b. Identify the areas of accounting and internal control systems that need tests of control.

c. Have a timely discussion with management and review management's plans and resolutions of any identified going concern issues.

d. Shorten the assessment period.

c. Have a timely discussion with management and review management's plans and resolutions of any identified going concern issues.

If adequate disclosure is not made by the entity regarding substantial doubt about its ability to continue as a going concern, the auditor should include in the report specific reference to the substantial doubt and should express

a. Unqualified opinion with explanatory paragraph.

b. A subject-to qualified opinion or adverse opinion.

c. Either an "except for" qualified opinion or an adverse opinion.

d. A disclaimer of opinion.

c. Either an "except for" qualified opinion or an adverse opinion.

If the auditor believes that the entity will not be able to continue as a going concern and the financial statements are prepared on a going concern basis, the auditor's report should include

a. Unqualified opinion with explanatory paragraph.

b. Qualified opinion.

c. Adverse opinion.

d. Disclaimer of opinion.

c. Adverse opinion.

If the auditor believes that management should extend its assessment but management refuses to do so, the auditor should

a. Rectify the lack of analysis by management.

b. Extend audit procedures to obtain sufficient appropriate evidence regarding the use of the going concern assumption.

c. Emphasize this matter in the audit report.

d. Consider a modification of the report as a result of the limitation in the scope of the auditor's work.

d. Consider a modification of the report as a result of the limitation in the scope of the auditor's work.

Management denied the auditor's request to extend its assessment of going concern ability. However, the auditor's other procedures are sufficient to assess the appropriateness of management's use of the going concern assumption in preparing the financial statements. The auditor should issue

a. Unqualified opinion.

b. Unqualified opinion with explanatory paragraph.

c. Adverse opinion.

d. Disclaimer of opinion.

a. Unqualified opinion.