CH5 AUDIT PLANNING

This involves developing an overall strategy for the expected conduct and scope of the examination; the nature, extent; and timing of which vary with the size and complexity, and experience with and knowledge of the entity

a. Audit planning

b. Audit procedure

c. Audit program

d. Audit working papers

a. Audit planning

Audit plans should

Precede actions

Be flexible

Be cost beneficial

a. No Yes No

b. Yes Yes Yes

c. Yes No Yes

d. No No Yes

b. Yes Yes Yes

Adequate planning of the audit work helps ensure that

- Appropriate attention is devoted to important areas

- All misstatements will be detected

- Potential problems are identified

- The work is completed expeditiously

a. Yes Yes Yes Yes

b. No Yes No Yes

c. Yes No Yes Yes

d. Yes No Yes No

c. Yes No Yes Yes

Which of the following is not normally performed in the planning stage of the audit?

a. Develop an overall audit strategy:

b. Request that bank balances be confirmed

c Schedule engagement staff and audit specialists.

d. Identify the client's reason for the audit.

b. Request that bank balances be confirmed

Which of the following procedures would a CPA ordinarily perform

during audit planning?

a. Obtain understanding of the client's business and industry

b. Review the client's bank reconciliation

c. Obtain client's representation letter

d. Review and evaluate client's internal control

a. Obtain understanding of the client's business and industry

Early appointment of the independent auditor will enable:

a. A more thorough examination to be performed.

b. A proper study and evaluation of internal control to be

performed.

c. Sufficient competent evidential matter to be obtained.

d. A more efficient examination to be planned.

d. A more efficient examination to be planned.

In developing the overall audit plan for a new client, factor not to be considered is

a. Materiality levels.

b. The client's business, including the structure of the organization and accounting system used

c. The amount of estimated audit fee

d. The audit risks an procedures to be performed to achieve audit

objectives

c. The amount of estimated audit fee

In planning the audit engagement, the auditor should consider each of the following except

a. Matters relating to the entity's business and the industry in which

it operates

b. The entity's accounting policies and procedures

c. Anticipated levels of control risk and materiality

d. The kind of opinion that is likely to be expressed

d. The kind of opinion that is likely to be expressed

A CPA is conducting the first examination of a client's financial statements. The CPA hopes to reduce the audit work by consulting with the predecessor auditor and reviewing the predecessor's working papers. This procedure is

a. Acceptable if the client and the predecessor auditor agree to it.

b. Acceptable if the CPA refers in the audit report to reliance upon the predecessor auditor's work.

c. Required if the CPA is to sender an unmodified opinion.

d. Unacceptable because the CPA should bring an independent viewpoint to a new engagement.

a. Acceptable if the client and the predecessor auditor agree to it.

Which of the following is not one of the three main reasons why the auditor should properly plan engagements?

a. To enable proper on-the-job training of employees

b. To enable the auditor to obtain sufficient competent evidence

c. To avoid misunderstandings with the client

d. To help keep audit costs reasonable

a. To enable proper on-the-job training of employees

During the initial planning phase of an audit, a CPA most likely would

a. Identify specific internal control activities that are likely to prevent fraud.

b. Evaluate the reasonableness of the client's accounting estimates.

c. Discuss the timing of the "audit procedures with the client's management.

d. Inquire of the client's attorney as to whether any unrecorded claims are probable of assertion.

c. Discuss the timing of the "audit procedures with the client's management.

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 control.

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

b. Comparing the financial statements to anticipated results.

Which of the following is the most likely first step an auditor would perform at the beginning of an initial audit engagement?

a. Prepare a rough draft of the financial statements and of the auditor's report.

b. Study and evaluate the system of internal administrative control

c. Tour the client's facilities and review the general records

d. Consult with and review the work of the predecessor auditor prior to discussing the engagement with the client management.

c. Tour the client's facilities and review the general records

A tour of the client's facilities is helpful in obtaining an understanding of the client's operations because

a. The auditor will be able to assess the physical safeguards over assets

b. The auditor may be better able to assess certain inherent risks

The auditor obtains a broader perspective about the company as a whole

d. All of the above

d. All of the above

Prior to beginning the field work on a new audit engagement in which a CPA does not possess expertise in the industry in which the client operates, the CPA should

a. Reduce audit risk by lowering the preliminary levels of materiality

b. Design special substantive tests to compensate for the lack of

industry expertise

c. Engage financial experts familiar with the nature of the industry

d. Obtain a knowledge of matters that relate to the nature of the entity's business

d. Obtain a knowledge of matters that relate to the nature of the entity's business

An extensive understanding of the client's business and industry and knowledge about the company's operations are essential for doing an adequate audit. For a new client, most of this information is obtained.

a. From the predecessor auditor

b. From the Securities and Exchange Commission

c. From the permanent file

d. At the client's premises

d. At the client's premises

The audit team gathers information about a new client's business and

a. An understanding of the clients internal control system relevant to financial reporting.

b. An understanding of how economic events and transactions affect the company's financial statements.

c. Information about engagement risk.

d. Information regarding whether the company is engaging in

fraudulent financial reporting.

b. An understanding of how economic events and transactions affect the company's financial statements.

In performing an audit of financial statements, the auditor should

obtain knowledge of the client's business sufficient to

a. Make constructive suggestions concerning improvements in

internal control

b. Identify transactions and events that may affect the financial statements

c. Develop an attitude of professional skepticism

d. Assess the level of control risk

b. Identify transactions and events that may affect the financial

statements

Each of the following may be relevant to an auditor when obtaining knowledge about the client's business and industry except

a. Discussion with people within or outside the entity.

b. Reading publications related to the industry

c. Visits of the entity's premises

d. Performing tests of control

d. Performing tests of control

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. Re-evaluate the client's internal control system

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

Which of the following statements is correct, when obtaining

understanding about the client's business?

a. The level of knowledge required of the auditor is ordinarily more than the level of knowledge possessed by management

b. Preliminary knowledge about the entity's industry must be obtained after accepting the engagement to determine whether the auditor has the necessary knowledge to perform the audit.

c. Following the acceptance of the engagement, the auditor should obtain detailed knowledge about the client's business preferably at the start of the engagement.

d. For continuing engagements, the auditor may no longer obtain knowledge about the client's business anymore.

c. Following the acceptance of the engagement, the auditor should obtain detailed knowledge about the client's business preferably at the start of the engagement.

Information about the client's business appropriately assists the auditor in:

-Assessing risks and identifying potential problems

-Planning and performing the audit effectively and efficiently.

-Evaluating audit evidence

a. Yes Yes Yes

b. Yes No Yes

c. No Yes Yes

d. Yes Yes No

a. Yes Yes Yes

On initial engagements, the auditor is required to obtain sufficient

appropriate evidence that

a. The opening balances do not contain material misstatements that materially affect the current period's financial statements.

b. The prior period's ending balances have been correctly brought forward to the current period or, when appropriate, have been restated.

c. Appropriate accounting policies are consistently applied or changes in accounting policies have been properly accounted for and adequately disclosed.

d. The prior period financial statements have been.

d. The prior period financial statements have been.

Why do auditors establish a preliminary judgment about materiality

a. To determine the appropriate level of staff to assign to the audit.

b. So that the client can know what records to make available to the auditor

c. To plan the appropriate audit evidence to accumulate and develop an overall audit strategy.

d. To finalize the control risk assessment.

c. To plan the appropriate audit evidence to accumulate and develop an overall audit strategy.

The preliminary judgment about materiality and the amount of audit evidence accumulated are _____ related.

a. Directly

b. Indirectly

c. Not

d. Inversely

d. Inversely

The auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatements, whether caused by errors or fraud, that are not ____ are detected,

a. Important to the financial statements

b. Statistically significant to the financial statements

c. Material to the financial statements

d. Identified by the client

c. Material to the financial statements

According to PSA 320, materiality should be considered by the auditor when:

-Determining the nature, timing

and extent of audit procedures.

-Evaluating the effects of.

misstatements.

a. Yes Yes

b. Yes No

c. No No

d. No Yes

a. Yes Yes

If an auditor sets a relatively high level of materiality, then the auditor will:

a. Accumulate more evidence than if a lower level had been set.

b. Accumulate less evidence than if a lower level had been set.

c. Accumulate approximately the same evidence as would be the case were materiality lower.

d. Accumulate an undetermined amount of evidence.

b. Accumulate less evidence than if a lower level had been set.

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 the applicable financial reporting framework, 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.

In developing the preliminary level of materiality in an audit, the auditor will

a. Look to audit standards for specific materiality guidelines

b. Increase the level of materiality if fraud is suspected.

c. Rely primarily on professional judgment to determine the materiality level

d. Use the same materiality level as that used for different clients in the same industry

c. Rely primarily on professional judgment to determine the materiality level

In making a preliminary judgment about materiality, the auditor initially determines the aggregate (overall) level of materiality for each statement.

For planning purposes, the auditor should use the

a. Levels separately

b. Largest aggregate level

c. Average of these levels

d. Smallest aggregate level

d. Smallest aggregate level

In planning the audit, the auditor should assess materiality at two levels

a. The preliminary level and the final level

b. The company level and the divisional level

c. The account balance level and the detailed item level

d. The financial statement level and the account balance level.

d. The financial statement level and the account balance level.

"Performance materiality" is usually set at an amount

a. Equal to the preliminary estimate of materiality

b. Lower than the preliminary estimate of materiality

c. Higher than the preliminary estimate of materiality

d. That could be either lower-or higher than the preliminary estimate of materiality depending on the circumstances

b. Lower than the preliminary estimate of materiality

All else being equal, as the level of materiality decreases, the amount of evidence required will:

a. Remain the same

b. Decrease.

c. Change in an unpredictable fashion

d. Increase

d. Increase

In considering materiality for planning purposes, an auditor believes that misstatements aggregating P100,000 would have a material effect on an entity's income statement, but those misstatements would have to aggregate P200,000: to materially affect the statement of financial position. Ordinarily, it would be appropriate to design auditing procedures that' would be expected to detect misstatements that aggregate

a. P100,000

b. P200,000

c. P150,000

d. P300,000

a. P100,000

Which of the following would an auditor most likely use in determining the preliminary estimate of materiality?

a. The anticipated sample size of the planned substantive tests.

b. The entity's annualized interim financial statements.

c. The results of the internal control questionnaire.

d. The contents of the management representation letter.

b. The entity's annualized interim financial statements.

Which of the following would most likely be. used in estimating materiality for a profit oriented entity?

a. Net sales

b. Net assets

c. Net income before tax

d. All of the above

c. Net income before tax

The concept of materiality

a. Applies only to publicly held firms

b. Has greater application to the standards of reporting than the other generally accepted auditing standards

c. Requires that relatively more effort be directed to those assertions that are more susceptible to misstatement

d. Requires the auditor to make judgments as to whether misstatements affect the fairness of the financial statements.

d. Requires the auditor to make judgments as to whether misstatements affect the fairness of the financial statements.

When comparing level of materiality used for planning purposes and the level of materiality used for evaluating evidence, one would most likely expect

a. The level of matcriality to be always similar.

b. The level of materiality for planning purposes to be smaller.

c. The level of materiality for planning purposes to be higher.

d. The level of materiality for planning purposes to be based on total assets while the level of materiality for evaluating purposes to be based on net income.

b. The level of materiality for planning purposes to be smaller.

When assessing materiality levels for audit purposes, the auditor should consider the

-Amount involve

-Nature of misstatement

a. Yes Yes

b. Yes No

c. No No

d. No Yes

a. Yes Yes

Auditors are responsible for determining whether financial statements are materially misstated, so upon discovering a material misstatements they must bring it to the attention of:

a. The regulators.

b. The audit firm's managing partner.

c. The client shareholders.

d. The client's management.

d. The client's management.

Qualitative factors can affect an auditor's assessment of materiality. Which of the following qualitative. factors could influence the assessment of materiality?

I. Misstatements that are otherwise immaterial may be material if they affect earnings trends.

II. Minor misstatements resulting from the consequences of contractual obligations.

a. I only

b. II only

c. I and II

d. Neither I nor II

c. I and II

Which of the following statements is not correct?

a. Materiality is a relative rather than an absolute concept.

b. The most important base used as the criterion for deciding materiality is total assets.

c. Qualitative factors as well as quantitative factors affect

materiality.

d. Given equal peso amounts, frauds are usually considered more

important than errors.

b. The most important base used as the criterion for deciding materiality is total assets.

Zia Corporation has a few large accounts receivable that total one million pesos whereas Natalie Corporation has many small accounts receivable that total one million pesos. Misstatement in any one account is more significant for Zia Corporation because of the concept of:

a. Materiality

b. Audit risk

c. Reasonable assurance

d. Comparative analysis

a. Materiality

The main reason why auditors make a preliminary assessment of

materiality and risk is to

a. Determine the type of opinion to express.

b. Determine the scope of the audit procedures to be performed.

c. Evaluate the integrity of client's management.

d. Have a basis for constructive suggestions to clients.

b. Determine the scope of the audit procedures to be performed.

The relationship between materiality and risk is ordinarily

a. Direct

b. Inverse

c. Parallel

d. None

b. Inverse

Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance to refer to _____

a. Detection risk

b. Audit report risk

c. Acceptable audit risk

d. Inherent risk

c. Acceptable audit risk

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued is the

a. Inherent risk

b. Acceptable audit risk

c. Statistical risk

d. Financial risk

b. Acceptable audit risk

A measure of the auditor's assessment of the likelihood that there are material misstatements in. an account before considering the effectiveness of the client's internal control is

a. Control risk

b. Acceptable audit risk

c. Statistical risk

d. Inherent risk

d. Inherent risk

In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following?

a. The internal audit department's objectivity in reporting a material- misstatement of a financial statement assertion it detects to the audit committee.

b. The risk the internal control system will not detect a material. misstatement of a financial statement assertion.

c. The risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion.

d. The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls.

d. The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls.

The risk that. a material misstatement in an assertion will not be prevented or detected on a timely basis by internal control is

a. Detection risk.

b. Control risk.

c. Inherent risk.

d. Audit risk.

b. Control risk.

The probability that an auditor's procedure leading to the conclusion that a material error does not exist in an account balance when, in fact, such error does exist is referred to as

a. Prevention risk.

b. Inherent risk.

c. Control risk

d. Detection risk.

d. Detection risk.

The risk that the auditor may express an incorrect opinion on the

financial statements is called

a. Inherent risk

b. Control risk

c. Detection risk

d. Audit risk

d. Audit risk

The risk that financial statements are likely to be misstated materially without regard to the effectiveness of internal control is the:

a. Inherent risk

b. Audit risk

c. Client risk

d. Control risk

a. Inherent risk

A measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of the client's internal control is called:

a. Control risk.

b. Acceptable audit risk.

c. Statistical risk.

d. Inherent risk.

d. Inherent risk.

Audit risk consists of all but the following components

a. Inherent risk

b. Substantive risk

c. Detection risk

d. Control risk

b. Substantive risk

For a particular assertion, control risk is the risk that:

a. A material misstatement will occur in the accounting process.

b. Controls will not detect a material misstatement that occurs.

c. Audit procedures will fail to detect a weak control system.

d. The prescribed control procedures will not be applied uniformly.

b. Controls will not detect a material misstatement that occurs.

Which of the following is the best definition of detection risk?

a. The auditor will compute audit materiality incorrectly.

b. The auditor will fail to detect material misstatements that exist.

c. The auditor will apply more audit procedures than are required in

the circumstances.

d. The auditor will fail to modify the audit opinion on financial statements that are materially misstated.

b. The auditor will fail to detect material misstatements that exist.

The audit risk against which the auditor and those who rely on his/her opinion require reasonable protection is a combination of three separate risks at the account balance or class-of-transactions level. The first risk is inherent risk. The second risk is that material misstatements will not be prevented or detected by internal control. The third risk is that

a. The auditor will reject a correct account balance as incorrect.

b. Material misstatements that occur will not be detected by the audit.

c. The auditor will apply an inappropriate audit procedure.

d. The auditor will apply an inappropriate measure of audit materiality.

b. Material misstatements that occur will not be detected by the audit.

The risk that the audit will fail to uncover a material misstatement is

eliminated

a. If a client has strong internal control.

b. If a client is not, publicly accountable entity.

c. When the auditor has complied with the Philippine Standard on

Auditing

d. Under no circumstances.

d. Under no circumstances.

When planning a financial statement audit, the auditor should assess inherent risk at the

-Financial statement level

-Account balance or transaction class level

a. Yes Yes

b. Yes No

c. No No

d. No Yes

a. Yes Yes

Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit function. An effective auditor will

a. Take any means available to reduce the risk to the lowest possible level

b. Set the risk level between 5% and 10%.

c. Perform the audit procedures first and quantitatively set the risk level before forming an opinion and writing the report.

d. Recognize that risk exists and deal with it in an appropriate manner.

d. Recognize that risk exists and deal with it in an appropriate manner.

The audit risk model is used primarily

a. For planning purposes in determining how much evidence to accumulate.

b. To test the effectiveness of controls.

To determine the type of opinion to express.

d. To evaluate the evidence which has been gathered.

a. For planning purposes in determining how much evidence to accumulate.

The risk of material misstatement includes

-Inherent risk

-Control risk

-Detection risk

a. Yes Yes Yes

b. Yes No No

c. No No Yes

d. Yes Yes No

d. Yes Yes No

As the risk of material misstatement increases, the acceptable level of detection risk should:

a. Increase.

b. Decrease.

c. Remain the same.

d. Increase or decrease depending on materiality level.

b. Decrease.

The risks of material misstatement differ from detection risk in that they:

a. Arise because audit procedures have been misapplied.

b. Can be controlled and changed by the auditor.

c. Can be assessed in quantitative and non-quantitative terms.

d. Are controllable by the client.

d. Are controllable by the client.

Inherent risk and control risk:

a. Are inversely related to each other.

b. Are inversely related to detection risk.

c. Are directly related to detection risk.

d. Are directly related to audit risk.

b. Are inversely related to detection risk.

Inherent risk and control risk differ from detection risk in that inherent and control risks

a. Arise from the misapplication of auditing procedures.

b. May be assessed in either quantitative or non-quantitative terms.

c. Exist independently of the financial statement audit.

d. Can be changed at the auditor's discretion.

c. Exist independently of the financial statement audit.

Which of the following is an incorrect statement?

a. Detection risk cannot be changed at the auditor's discretion.

b. If individual audit risk remains the same, detection risk bears an inverse relationship to inherent and control risks.

c. The greater the inherent and control risks the auditor believes exists, the less detection risk that can be accepted.

d. The auditor might make a separate or a combined assessment of inherent risk and control risk.

a. Detection risk cannot be changed at the auditor's discretion.

The acceptable level of detection risk is inversely related to the

a. Assurance provided by substantive tests.

b. Risk of misapplying auditing procedures.

c. Preliminary judgment about materiality levels

d. Risk of failing to discover material misstatements

a. Assurance provided by substantive tests.

Relationship between control risk and detection risk is ordinarily

a. Parallel

b. Direct

c. Inverse

d. Equal

c. Inverse

Which of the following conditions supports an increase in detectior

a. Internal control over cash receipts is excellent.

b. Application of analytical procedures reveals a significant increase in sales revenue in December, the last month of the fiscal year

c. Internal control over shipping, billing, and recording of sale: revenue is weak.

d. Study of the business reveals that the client recently acquired new company in an unrelated industry.

a. Internal control over cash receipts is excellent.

Which of the following is not a primary consideration when assessing inherent risk?

a. Nature of client's business

b. Existence of related parties.

c. Degree of separation of duties within the entity

d. Susceptibility to defalcation

c. Degree of separation of duties within the entity

An auditor uses.the assessed level of control risk to

a. Evaluate the effectiveness of the entity's internal control policies and procedures

b. Identify transactions and account balances where inherent risk is at a high level.

c. Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high

d. Determine the acceptable level of detection risk for financial statements

d. Determine the acceptable level of detection risk for financial statements

Which of the following would be considered the most conservative settings for inherent risk and control risk?

-Inherent Risk

-Control Risk

a. 1.0 1.0

b. 1.0 0.0

c. 0.0 0.0

d. 0.5 0.5

a. 1.0 1.0

What is the magnitude of audit risk if inherent risk is .50, control risk .40, and detection risk .10?

a. .20

b. .04

c. .10

d. .02

d. .02

An inherent risk (IR) of 40% and a control risk of (CR) of 60% after planned detection risk and planned evidence differently than

a. IR of 60% and CR of 40%

b. IR of 80% and CR of 30%

c. IR of 100% and CR of 24%

d. IR of.70% and CR of 30%

d. IR of.70% and CR of 30%

Inherent risk is defined as the susceptibility of an account balance or class of transactions to error that could be material assuming that there were no related internal controls. Of the following conditions which one does not increase inherent risk?

a. The client has entered numerous related party transactions during the year under audit

b. Internal control over shipping, billing, and recording of sales revenue is weak.

c. The client has lost a major customer accounting for approximately 30% of annual revenue

d. The board of directors approved a substantial bonus for the president and chief executive office and also approved an attractive stock option plan for themselves.

b. Internal control over shipping, billing, and recording of sales revenue is weak.

According to auditing standards, the auditor uses the assessed level of control risk (together with the assessed level of inherent risk) to determine the acceptable level of detection risk for financial statement assertions. As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the

a. Nature of substantive tests to more effective procedures.

b. Timing of substantive tests, such as performing them at year-end rather than at an interim date.

c. Extent of substantive tests, such as using larger sample size.

d. Assurance provided by substantive tests to a lower level.

d. Assurance provided by substantive tests to a lower level.

As the acceptable level of detection risk decreases, an auditor may change the

a. Timing of substantive tests by performing them at an interim date rather than at year-end

b. Nature of substantive tests from less effective to more effective on audit procedures.

c. Timing of tests of controls by performing them at several dates rather than at one time

d. Assessed level of inherent risk to a higher level

b. Nature of substantive tests from less effective to more effective on audit procedures.

As the acceptable level of detection risk decreases, an auditor may

a. Reduce substantive testing by relying on the assessments of risk and control risk.

b. Postpone the planned timing of substantive tests from interim dates to the year-end.

c. Eliminate the assessed level of inherent risk from consideration as a planning factor.

d. Lower the assessed level of control risk

b. Postpone the planned timing of substantive tests from interim dates to the year-end.

Inherent risk is ___ related to detection risk and ___ related to the amount of audit evidence

a. Directly, inversely

b. Directly, directly

c. Inversely, inversely

d. Inversely, directly

d. Inversely, directly

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

a. Decrease substantive testing.

b. Increase inherent risk.

c. Decrease detection risk.

d. Increase materiality levels.

c. Decrease detection risk.

Which of the following is not correct regarding an auditor's decision that a lower acceptable audit risk is appropriate?

a. More evidence is accumulated.

b. Less evidence is accumulated.

c. Special care is required in assigning experienced staff.

d. Review of audit documentation is performed by personnel not assigned to the engagement.

b. Less evidence is accumulated.

Which of the following statements is not true?

a. Inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related to the amount of audit evidence required.

b. Inherent risk is directly related to evidence whereas detection risk is inversely related to the amount of audit evidence required.

c. Inherent risk is the susceptibility of the financial statements to material error, assuming no internal controls.

d. Inherent risk and control risk are assessed by the auditor and function independently of the financial statement audit.

a. Inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related to the amount of audit evidence required.

Which of the following statements is not true about the auditor's assessment of inherent risk when planning a financial statement audit?

a. In developing the overall audit plan, the auditor should assess inherent risk at the financial statement level.

b. In developing an audit program, the auditor should assess inherent risk at the account balance or transaction class level.

c. The auditor can make. a separate or combined assessment of inherent and control risk.

d. The auditor's assessment of inherent risk is influenced by the condition of the client's accounting and internal control systems.

d. The auditor's assessment of inherent risk is influenced by the condition of the client's accounting and internal control systems.

The auditor should obtain sufficient understanding of the entity and its environment, including its internal control in order to

-Identify and assess the risk of material misstatement

-Design appropriate audit procedures

a. Yes Yes

b. Yes No

c. No No

d. No Yes

a. Yes Yes

Collectively, procedures performed to obtain an understanding of the entity and its environment, including internal controls, are called

a. Audit strategy.

b. Tests of controls

c. Risk assessment procedures.

d. Substantive procedures.

c. Risk assessment procedures.

Risk assessment procedures would include all of the following except

a. Inquiries of management and others within the entity.

b. Analytical procedures.

c. Observation and inspection.

d. Reperformance of client's procedures.

d. Reperformance of client's procedures.

Risk assessment procedures are performed by auditors during an audit in order to:

a. Determine the risk of material misstatement in the financial statements.

b. Determine the acceptable level of audit risk.

c. Determine the level of materiality.

d. Determine whether engagement will be accepted.

a. Determine the risk of material misstatement in the financial statements.

Which of the following is least likely to be considered a risk assessment procedure?

a. Analytical procedures

b. Confirmation of ending accounts receivable

c. Inspection of documents

d. Observation of the performance of certain account procedures.

b. Confirmation of ending accounts receivable

The main purpose of risk assessment procedure is to

a. Obtain an understanding of the entity and its environment including its internal control; and to assess the risks of material misstatement at the financial statement and assertion level.

b. Test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.

c. Detection material misstatements at the assertion level.

d. All of the given choices are main purposes of risk assessment procedures.

a. Obtain an understanding of the entity and its environment including its internal control; and to assess the risks of material misstatement at the financial statement and assertion level.

The auditor is likely to accumulate more evidence when the audit is for a company

a. Whose stock is publicly held

b. Which has extensive indebtedness

c. Which is to be sold in the near future

d. All three of the above

d. All three of the above

At what point in the audit are tests of details most appropriately designed?

a. Engagement evaluation

b. Planning

c. Testing

d. Any of the above

b. Planning

Which of the following is not a potential effect of an auditor's decision that a lower acceptable audit risk is appropriate

a. More evidence is required

b. Less evidence is required

c. Special care is required in assigning experienced staff

d. Review of the audit files by personnel who were not assigned to the engagement.

b. Less evidence is required

It is easier and more common to implement increased evidence

accumulation for inherent risk than for acceptable audit risk because

a. Inherent risk can usually be isolated to one or two accounts

b. Inherent risk applies to the entire audit

c. Acceptable audit risk and sample sizes are set statistically.

d. Acceptable audit risk does not impact on the amount of evidence which must be accumulated.

a. Inherent risk can usually be isolated to one or two accounts

These consist of the analysis of significant ratios and trends including the resulting investigation of fluctuations and relationship that are inconsistent with other relevant information or deviate from predictable amount

a. Financial statement analysis

b. Variance analysis

c. Analytical procedures

d. Regression analysis

c. Analytical procedures

Evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data involving comparisons of recorded amounts to expectations developed by the auditor is a definition of

a. Analytical procedures

b. Tests of balances

c. Tests of transactions

d. Auditing

a. Analytical procedures

The purpose of analytical procedures during the audit planning stage is to

a. Aid in planning the observation of physical inventory.

b. Identify unusual circumstances that the auditor may need to investigate further.

c. Flag individual transactions for further review.

d. Determine whether sales transactions are approved.

b. Identify unusual circumstances that the auditor may need to investigate further.

Unusual fluctuations occur when

a. Significant differences are not expected but do exist

b. Significant differences are expected but do not exist

c. Significant differences are expected and do exist

d. Either A or B is true

d. Either A or B is true