AUDTHEO: Audit Planning and Risk Assessment Procedures

It involves establishing the overall audit strategy for the engagement and developing an audit plan in order to reduce audit risk to an acceptably low level.

Planning

Adequate planning of the audit work helps the auditor of accomplishing the following objectives:

* Ensuring that appropriate attention is devoted to important areas of the audit.
* Identifying the areas that need a service of an expert.
* The audit work is completed efficiently.

Adequate planning of the audit work ==**does not**== help the auditor in accomplishing this objective

Gathering of all corroborating audit evidence

The extent of planning will vary according to any of the following:

* Size of the audit client.
* Auditor's experience with the entity and knowledge of the business.
* The nature and complexity of the audit engagement

This activity shall ==**not**== be included in preplanning an audit

Determining the likelihood of issuing an unqualified audit opinion on the client’s financial statements

The auditors plan should:

* Precede action
* Be flexible
* Be cost-beneficial

These matters should be considered by the auditor in developing the overall audit strategy:

* Important characteristics of the entity, its business, its financial performance and its reporting requirements including changes since the date of the prior audit
* Conditions requiring special attention, such as the existence of the related parties
* The setting of materiality level for audit purposes

The timing of the audit and nature of communications required ==**does not** ==include:

Audit areas where there is a higher risk of material misstatement

In developing the overall audit strategy, the focus of the engagement team’s efforts is considered. Which of the is ==**not**== appropriately classified as a factor affecting the focus of the team’s efforts?

The financial reporting framework on which the financial information to be audited has been prepared, including any need for reconciliation to another reporting framework.

In developing an overall audit strategy, an auditor should consider:

Preliminary evaluations of materiality, audit risk, and internal control.

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.

Audit Program

The auditor should design the written audit program, so that:

The audit procedures selected will achieve specific audit objectives.

One of the primary uses of an audit program is to

Serve as a tool for planning, directing and controlling the audit work

An audit program is ordinarily prepared for an audit engagement because:

It aids in instructing assistants in the work to be done.

The audit program usually ==**cannot**== be finalized until the

Consideration of the entity’s internal control has been completed.

The audit program should contain the following, except:

The combined assessed level of inherent and control risk

The audit program should contain the following:

* Audit objective
* Time budget for the various audit areas
* Set of planned audit procedures

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

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.

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

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

This is ==**not**== performed as a part of planning an audit engagement;

Test of controls

These are performed as a part of planning an audit engagement:

* Reviewing working papers of the prior year
* Designing an audit program
* Performing analytical procedures

Which of the following procedures ==**not**== normally performed as part of obtaining an understanding of the client’s environment?

Confirming customer accounts receivable for existence and valuation

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

Selecting a sample of vendor’s invoices for comparison to receiving reports.

Which audit risk components maybe assessed in %%**quantitative**%% terms?

* Inherent Risk
* Control Risk
* Detection Risk

Some accounts balances, such as those for retirement benefits and finance lease, are the results of complex calculations. The susceptibility to material misstatements in these types of accounts is referred to as:

Inherent Risk

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are:

Functions of the client and its environment while detection risk is not.

There is an inverse relationship that exist between the acceptable level of detection risk and the _____.

Assurance provided by substantive tests

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk, and therefore the risk of material misstatement, 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:

Decrease detection risk

Which of the following would an auditor __most likely__ use in determining the auditor’s preliminary judgment about materiality?

The entity’s annualized interim financial statements.

In considering materiality for planning purposes, Munda, auditor believes that misstatements aggregating P60,000 would have material effect on an entity’s income statement, but that misstatements would have to aggregate P40,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate:

P40,000

Which matter would an auditor __most likely__ consider when establishing the scope of the audit?

The expected audit coverage, including the number and locations of the entity’s components to be included.

In connection with the planning phase of an audit engagement, this statement is %%**always correct**%%

A portion of the audit of a continuing audit client can be performed at interim dates.

A retailing entity uses the Internet to execute and record its purchase transactions. The entity's auditor recognizes that the documentation of details of transactions will be retained for only a short period of time. To compensate for this limitation, the auditor most likely would:

Perform tests several times during the year, rather than only at year-end.

Which of the following matters would an auditor __least likely__ to consider when setting the direction of the audit?

The availability of client personnel and data.