AT.05 Audit Planning and Materiality Drill

Why is it important for the auditor to understand the entity’s management and governance structure?

Choices:

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To assess the tone at the top and how it influences the control environment

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To prepare the financial statements on behalf of management

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To determine the tax obligations of the entity

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To verify the accuracy of individual journal entries

To assess the tone at the top and how it influences the control environment

Feedback: Correct. Understanding management and governance helps the auditor assess the control environment, particularly the ethical tone set by those charged with governance, which influences the reliability of financial reporting.

Why is it important for the auditor to review the corporate minutes of meetings during an audit?

Choices:

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To identify significant decisions and events that may affect the financial statements

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To verify the accuracy of all cash transactions

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To approve the company’s accounting policies

-

To test the completeness of sales invoices

To identify significant decisions and events that may affect the financial statements

Feedback: Correct. Reviewing minutes helps the auditor identify key decisions, commitments, approvals, or pending matters (e.g., lawsuits, dividends, borrowings) that may have a financial reporting impact.

As the acceptable level of detection risk decreases, the assurance directly provided from

Choices:

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Substantive tests should increase.

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Substantive tests should decrease.

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Tests of controls should increase.

-

Tests of controls should decrease.

Substantive tests should increase.

Which of the following is correct concerning performance materiality on an audit?

Choices:

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It will ordinarily be less than financial statement materiality.

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It should be established at beginning of an audit and not be revised thereafter.

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It should be established at separate amounts for the various financial statements.

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It need not be documented in the working papers.

It will ordinarily be less than financial statement materiality.

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

Choices:

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

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Reading the current year’s interim financial statements

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Coordinating the assistance of the entity personnel in data preparation

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Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity

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

Feedback: This choice is correct. This is performed during testing phase rather than planning phase.

Which of the following statements is incorrect?

Choices:

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Compliance and operations are totally irrelevant to the auditor.

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Relevant to the auditor is the objective related to financial reporting.

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All objectives (financial reporting, compliance, and operations) are important for the client.

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Compliance and operations may also affect financial reporting.

Compliance and operations are totally irrelevant to the auditor.'

Feedback: Correct. Incorrect statement. Compliance and operations are not totally irrelevant to the auditor. While the primary audit focus is on financial reporting, issues in compliance (e.g., penalties, lawsuits) and operations (e.g., inefficiencies, fraud risks) can have a direct or indirect impact on the financial statements.

When performing risk assessment procedures, which of the following is a typical focus of the audit team's discussions, according to PSA 315?

Choices:

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The areas where the entity may be prone to material misstatement

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The entity's holiday schedule

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The entity's marketing strategies

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The personal traits of the entity's management

The areas where the entity may be prone to material misstatement

In audit of financial statements, it is considered in terms of the smallest aggregate level of misstatements that could be considered material to any one of the statements that comprise the financial statements, while in financial reporting, it provides a threshold or cutoff point rather than being a primary qualitative characteristic which information must have if it is to be useful

Choices:

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Materiality

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Reliability

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Relevance

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Misstatement

Materiality

What is the process for identifying risk of material misstatement at the overall financial statement level primarily involves?

Choices:

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Examining only the income statement.

-

Looking at only the balance sheet.

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Looking at individual transaction level.

-

Understanding the entity and its environment, including its internal control.

Understanding the entity and its environment, including its internal control.

Which of the following is least likely to be comparable between similar corporations in the same industry line of business?

Choices:

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Accounts receivable turnover

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Earnings per share

-

Gross profit percent

-

Return on assets before interest and taxes

Earnings per share

Which of the following statements most likely would be included in an engagement letter from an auditor to a client?

Choices:

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The CPA firm will provide absolute assurance about whether the financial statements are free of material misstatement.

-

The CPA firm is responsible for ensuring that the client complies with applicable laws.

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The CPA firm will involve information technology specialists in the performance of the audit.

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The CPA firm will adjust the financial statements to correct misstatements before issuing a report.

The CPA firm will involve information technology specialists in the performance of the audit.

During the audit planning stage, which of the following sources would NOT be typically considered to understand an entity's business environment?

Choices:

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Financial statements of the entity

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Competitor's marketing strategy

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Discussions with entity personnel

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Entity's tax filings

Competitor's marketing strategy

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

Choices:

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

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Comparing the financial statements to anticipated results.

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Examining computer generated exception reports to verify the effectiveness of internal control.

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

Comparing the financial statements to anticipated results.

Which one of the following is a valid source of information about the client's processes?

Choices:

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Management inquiry

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Review of the client's budget

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Tour of client’s plant and operations

-

All are valid sources.

All are valid sources.

The primary objective of procedures performed to obtain an understanding of the entity and its environment is to provide an auditor with:

Choices:

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Knowledge necessary for risk assessment and audit planning.

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Audit evidence to use in assessing inherent risk.

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A basis for issuing an opinion on the financial statements.

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An evaluation of the consistency of application of management's policies.

Knowledge necessary for risk assessment and audit planning.

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

Choices:

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

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Evaluate the reasonableness of the client's accounting estimates.

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

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

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

What should the auditor do if the requested change from a higher to a lower level of assurance engagement is not justified and the auditor is prevented from continuing the original engagement?

Choices:

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Resign from the engagement

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Reject and continue with the current engagement

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Issue an unmodified report

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Issue the report based on the revised agreement without referring to the original engagement

Resign from the engagement

Feedback: Correct. If the client prevents the auditor from continuing the original (higher-assurance) engagement and the reason for changing to a lower-level engagement is not justified, the auditor should resign from the engagement to maintain professional and ethical standards.

Which of the following statements about significant risks is incorrect?

Choices:

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They require special audit consideration.

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They may relate to recent significant economic, accounting or other developments.

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They generally pertain to routine transactions that are subject to systematic processing.

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They may arise from the complexity of transactions.

They generally pertain to routine transactions that are subject to systematic processing.

Which of the following is the most critical reason why a CPA firm may decide to discontinue a continuing audit client?

Choices:

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Disagreements over the audit scope or type of opinion in the prior year

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Unpaid audit fees from previous engagements

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High audit risk due to possible regulatory issues

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The auditor determines that the client lacks integrity

The auditor determines that the client lacks integrity

Feedback: Correct. A lack of client integrity is the most serious concern for an auditor. It undermines trust and creates a high risk of misstatement or fraud, warranting immediate consideration for withdrawal from the engagement.

Which of the following parties would normally attend a planning meeting held before the beginning of an audit engagement to discuss relevant client information and the audit approach to be taken in performing the engagement?

Choices:

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Engagement partner and the client’s chief financial officer

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Engagement partner and audit manager

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Engagement partner, audit manager, and senior auditor

-

Engagement partner, audit manager, senior auditor, and junior audit staff members

Engagement partner, audit manager, senior auditor, and junior audit staff members

Which of the following is not one of the benefits why the auditor should properly plan engagements?

Choices:

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Assist in the proper selection of engagement team members and the assignment of work to them.

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Facilitate the direction and supervision of engagement team members and the review of their work.

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Assist in coordination of work done by auditors of components and experts.

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Ensure gathering of sufficient appropriate audit evidence.

Ensure gathering of sufficient appropriate audit evidence.

Which of the following is not an example of analytical evidence?

Choices:

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Compared inventory turnover by major class with the prior year on a monthly and quarterly basis.

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Compared gross profit percentages by major product classes with the prior year.

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Examined monthly performance reports and investigated significant variations from budgeted amounts.

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Examined invoices for plant asset additions to determine whether the client had erroneously recorded ordinary repairs as plant assets.

Examined invoices for plant asset additions to determine whether the client had erroneously recorded ordinary repairs as plant assets.

Which of the following is not typically asked or inquired from the predecessor auditor?

Choices:

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Sampling method used in audit of receivables

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Understanding as to the reasons for change in auditor

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Disagreement with client regarding accounting policies

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Communication to audit committee about significant deficiencies in controls

Sampling method used in audit of receivables

Feedback: Correct. The sampling method used in the prior audit is generally not a required inquiry. The successor auditor designs their own procedures and does not rely on specific techniques used by the predecessor.

Inquiries directed towards those charged with governance may most likely

Choices:

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Relate to their activities concerning the design and effectiveness of the entity’s internal control and whether management  has satisfactorily responded to any findings from those activities

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Help the auditor in understanding the environment in which the financial statements are prepared

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Relate to changes in the entity’s marketing strategies, sales trends or contractual arrangements with its customers

-

Help the auditor in evaluating the appropriateness of the selection and application of certain accounting policies

Help the auditor in understanding the environment in which the financial statements are prepared

As a lower acceptable level of materiality is established, the auditor should plan more work on individual accounts to

Choices:

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Find smaller misstatements.

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Find larger misstatements.

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Increase the tolerable misstatement in the accounts.

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Decrease the risk of assessing control risk too low.

Find smaller misstatements.

Which of the following statements is correct concerning the concept of materiality?

Choices:

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Materiality is determined by reference to PICPA guidelines

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Materiality depends only on the peso amounts of an item relative to other items in the financial statements

-

Materiality depends on the nature of an item rather than the peso amount

-

Materiality is a matter of professional judgment

Materiality is a matter of professional judgment

Which of the following statements is not correct?

Choices:

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Analytical procedures are used to isolate accounts or transactions that should be investigated more extensively.

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For certain immaterial accounts, analytical procedures may be the only evidence needed.

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In some instances, other types of evidence may be reduced when analytical procedures indicate that an account balance appears reasonable.

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Analytical procedures use supporting documentation to determine which account balances need additional detailed procedures.

Analytical procedures use supporting documentation to determine which account balances need additional detailed procedures.

Analytical procedures used in planning an audit should focus on identifying

Choices:

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material weaknesses in internal control.

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the predictability of financial data from individual transactions.

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the various assertions that are embodied in the financial statements.

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areas that may represent specific risks relevant to the audit.

areas that may represent specific risks relevant to the audit.

With respect to planning an audit, which of the following statements is always true?

Choices:

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It is acceptable to perform a portion of the audit of a continuing audit client at interim dates.

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An engagement should not be accepted after the client's year-end.

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An inventory count must be observed at year-end.

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Final staffing decisions must be made prior to completion of the planning stage.

It is acceptable to perform a portion of the audit of a continuing audit client at interim dates.

An example of an analytical procedure is the comparison of

Choices:

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Financial information with similar information regarding the industry in which the entity operates

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Recorded amounts of major disbursements with appropriate invoices

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Results of a statistical sample with the expected characteristics of the actual population

-

EDP generated data with similar data generated by a manual accounting system

Financial information with similar information regarding the industry in which the entity operates

In performing an audit, which one of the following procedures would be considered an analytical procedure?

Choices:

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Comparing last year’s interest expense with this year’s interest expense.

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Comparing signatures on checks with the signatures of authorized check signers.

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Reviewing initials on received documents

-

Reviewing procedures followed in receiving, depositing, and disbursing cash.

Comparing last year’s interest expense with this year’s interest expense.

What type of analytical procedure would an auditor most likely use in developing relationships among balance sheet accounts when reviewing the financial statements of a nonpublic entity?

Choices:

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Trend analysis.

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Regression analysis.

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Ratio analysis.

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Risk analysis.

Ratio analysis.

Which of the following activities would usually be performed by the manager in a public practice firm?

Choices:

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Deciding on the appropriate audit opinion

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Liaising with the client with respect to the timing of audit work

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Performing detailed tests of transactions and balances

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Meeting with clients and potential clients to discuss the firm’s services

Liaising with the client with respect to the timing of audit work

Which of the following statements is correct regarding the predictability of analytical procedures in a financial statement audit?

Choices:

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Relationships involving only balance sheet accounts tend to be more predictable than relationships involving income statement accounts.

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Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts.

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Relationships involving transactions subject to management discretion tend to be more predictable than automated transactions.

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Relationships in a dynamic environment tend to be more predictable than relationships in a stable environment.

Relationships involving income statement accounts tend to be more predictable than relationships involving only balance sheet accounts.

Which of the following statements would least likely appear in an auditor's engagement letter?

Choices:

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Fees for our services are based on our regular per diem rates, plus travel and other out-of-pocket expenses.

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During the course of our audit we may observe opportunities for economy in, or improved controls over, your operations.

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Our engagement is subject to the risk that material misstatements or fraud, if they exist, will not be detected.

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After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.

After performing our preliminary analytical procedures we will discuss with you the other procedures we consider necessary to complete the engagement.

When a change in the type of engagement from a higher to a lower level of assurance is reasonably justified, the report based on the revised engagement should not refer to procedures performed under the original engagement, except if the new engagement is a:

Choices:

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Agreed-upon procedure

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Review engagement

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Compilation services

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Management consulting services

Agreed-upon procedure

Feedback: Correct. In an agreed-upon procedures engagement, the auditor is allowed to refer to specific procedures performed because that is the nature of the engagement. The report describes the procedures and findings without providing assurance.

Analytical procedures are

Choices:

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Never required

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Required for planning, substantive testing, and overall review of the financial statements

-

Required for planning and overall review of the financial statements

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Required during planning only

Required for planning and overall review of the financial statements

Which of the following statements is correct regarding the auditor's determination of materiality?

Choices:

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The planning level of materiality should normally be the larger of the amount considered for the balance sheet versus the income statement.

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The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts.

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Auditors may use various rules of thumb to arrive at an evaluation level of materiality, but not for determining the planning level of materiality.

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The amount used for the planning should equal that used for evaluation.

The auditors' planning level of materiality may be disaggregated into smaller "tolerable misstatements" for the various accounts.

The purpose of risk assessment procedures is to

Choices:

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Obtain sufficient and appropriate evidence as a basis for identifying and assessing risks of material misstatements.

-

Reduce detection risk

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Evaluate management ability

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Determine the operating effectiveness of controls

Obtain sufficient and appropriate evidence as a basis for identifying and assessing risks of material misstatements.

Which of the following is least likely to be included in an auditor's inquiry of management while obtaining information to identify the risks of material misstatement due to fraud?

Choices:

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Are all financial reporting operations at one location?

-

Does it have knowledge of fraud or suspect fraud?

-

Does it have programs to mitigate fraud risks?

-

Has it reported to the audit committee the nature of the company's internal control?

Are all financial reporting operations at one location?

Which of the following best describes the relationship between business risk and the risk of material misstatement?

Choices:

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Business risk is broader and includes financial and non-financial risks, while the risk of material misstatement is narrower and focused on risks affecting the financial statements.

-

Business risk and the risk of material misstatement are essentially the same and used interchangeably in audits.

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Risk of material misstatement includes all types of business risk, whether or not they affect financial reporting.

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Business risk is a concern only for management, not for the auditor.

Business risk is broader and includes financial and non-financial risks, while the risk of material misstatement is narrower and focused on risks affecting the financial statements.

Feedback: Correct. Business risk is a broad concept encompassing both financial and non-financial risks (e.g., regulatory, operational, reputational), while risk of material misstatement (RMM) specifically refers to risks that could cause the financial statements to be materially misstated—hence more relevant to audit planning.

Early appointment of the independent auditor will enable:

Choices:

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a more thorough examination to be performed.

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a proper study and evaluation of internal control to be performed.

-

sufficient competent evidential matter to be obtained.

-

a more efficient examination to be planned.

a more efficient examination to be planned.

Feedback: This choice is correct. Early appointment of an auditor provides a more efficient examination to be planned.

How can the audit strategy and audit program best be described at the beginning of the audit process?

Choices:

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Tentative.

-

Conclusive.

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Comprehensive.

-

Optional.

Tentative.

Feedback: This choice is correct. The audit strategy at the beginning of the audit process is still tentative and my still be changed on the light of new information.

Which of the following is not a typical analytical review procedure?

Choices:

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Study of relationships of the financial information with relevant non-financial information.

-

Comparison of the financial information with similar information regarding the industry in which the entity operates.

-

Comparisons of recorded amounts of major disbursements with appropriate invoices.

-

Comparisons of the financial information with budgeted amounts.

Comparisons of recorded amounts of major disbursements with appropriate invoices.

Audit plans should be designed so that

Choices:

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Most of the required procedures can be performed as interim work.

-

Inherent risk is assessed at a sufficiently low level.

-

The auditor can make constructive suggestions to management.

-

The audit evidence gathered supports the auditor's conclusions.

The audit evidence gathered supports the auditor's conclusions.

Which of the following statements is not correct?

Choices:

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Materiality is a relative rather than an absolute concept.

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

-

Qualitative factors as well as quantitative factors affect materiality.

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Given equal amounts, frauds are usually considered more important than errors.

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

Feedback: This choice is correct. The basis for determining materiality depends on the professional judgment of the auditor and it is not always based on total assets. It depends on what the auditor believes is most important to the users of the financial statements.

Which of the following relatively small misstatements most likely could have a material effect on an entity’s financial statements?

Choices:

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An illegal payment to a foreign official that was not recorded.

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A piece of obsolete office equipment that was not retired.

-

A petty cash fund disbursement that was not properly authorized.

-

An uncollectible account receivable that was not written off.

An illegal payment to a foreign official that was not recorded.

Which of the following best explains why related party transactions are significant to the auditor?

Choices:

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They may not be conducted under normal market terms and conditions.

-

They are always immaterial to the financial statements.

-

They are automatically eliminated in consolidated financial statements.

-

They require no disclosure if approved by management.

They may not be conducted under normal market terms and conditions.

Feedback: Correct. Related party transactions may involve terms that are not at arm’s length, increasing the risk of misstatement or fraud. Auditors must evaluate their substance and proper disclosure.

Tolerable misstatement is

Choices:

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Materiality allocated to an assertion

-

Materiality for the balance sheet as a whole

-

Materiality for the income statement as a whole

-

Materiality allocated to a specific account

Materiality allocated to a specific account

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

Choices:

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

-

The overall audit strategy and audit plan.

-

All major stakeholder groups.

-

An internal control questionnaire identifying controls that assure specific objectives will be achieved.

The overall audit strategy and audit plan.

Which of the following tasks is least likely to be performed by an audit manager assigned to an engagement?

Choices:

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Reviewing working papers prepared by audit staff members

-

Confirming bank balances

-

Estimating the required allowance for obsolescence of inventories

-

Drafting a management letter at the conclusion of an engagement

Confirming bank balances

Auditors are assessing the control risk of a service-oriented company and find that the company has weak controls over the recording of revenue transactions. Given this control risk, what might be a suitable audit approach to mitigate this risk?

Choices:

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Apply analytical procedures to all revenue transactions.

-

Increase the extent of tests of details of revenue transactions.

-

Rely more heavily on the company's internal audit function.

-

Reduce the level of substantive testing on revenue transactions.

Increase the extent of tests of details of revenue transactions.

What should the auditor do if the requested change from a higher to a lower level of assurance engagement is not justified?

Choices:

-

Reject and continue with the current engagement

-

Issue an unmodified report

-

Resign from the engagement

-

Issue the report based on the revised agreement without referring to the original engagement

Reject and continue with the current engagement

Which of the following factors would a CPA ordinarily consider in the planning stage of an audit engagement?

I. Financial statement accounts likely to contain a misstatement.
II. Conditions that require extension of audit tests.

Choices:

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I only.

-

II only.

-

Both I and II.

-

Neither I nor II.

Both I and II.

Initial audit planning involves four matters. Which of the following is not one of these?

Choices:

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Develop an overall audit strategy.

-

Request that bank balances be confirmed.

-

Schedule engagement staff and audit specialists.

-

Identify the client’s reason for the audit.

Request that bank balances be confirmed.

Which of the following is not a concern as to whether a misstatement is qualitatively material?

Choices:

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The misstatement hides a failure to meet analysts' expectations

-

The misstatement is less than 5% of pretax income

-

The misstatement increases management's compensation

-

The misstatement changes a small amount of profit to a small reported loss

The misstatement is less than 5% of pretax income

An auditor compares year-to-year account balances in order to perform analytical procedures.  This is an example of:

Choices:

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Vertical analysis

-

Internal control analysis

-

Trend analysis

-

Ratio analysis

Trend analysis

With respect to planning an audit, which of the following statements is always true?

Choices:

-

It is acceptable to perform a portion of the audit of a continuing audit client at interim dates.

-

An engagement should not be accepted after the client's year-end.

-

An inventory count must be observed at year-end.

-

Final staffing decisions must be made prior to completion of the planning stage.

It is acceptable to perform a portion of the audit of a continuing audit client at interim dates.

Which of the following are the most common techniques used in obtaining knowledge of a client in the planning phase of an audit engagement?

Choices:

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Confirmation, enquiry, analysis, reperformance

-

Enquiry, analysis, observation, inspection

-

Enquiry, analysis, observation, reperformance

-

Vouching, tracing, discussion, analysis

Enquiry, analysis, observation, inspection

Which of the following is not an information source for developing analytical procedures used in the audit?

Choices:

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Relationships among financial statement elements

-

Relationships between financial and relevant nonfinancial data

-

Comparison of financial data with anticipated results (e.g., budgets and forecasts)

-

Comparison of current year financial data with projections for next year's financial results

Correct answer: Comparison of current year financial data with projections for next year's financial results

The audit team gathers information about a new client's business and industry in order to obtain:

Choices:

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an understanding of the clients internal control system for financial reporting.

-

an understanding of how economic events and transactions have an effect on the company's financial statements.

-

information about engagement risk.

-

information regarding whether the company is engaging in financial statement fraud.

Correct answer: an understanding of how economic events and transactions have an effect on the company's financial statements.

Which of the following is an appropriate audit procedure for identifying related party transactions?

Choices:

-

Reviewing board minutes for authorizations and discussions

-

Ignoring transactions below a materiality threshold

-

Confirming all balances with external lenders

-

Relying solely on management’s representation letter

Correct answer: Reviewing board minutes for authorizations and discussions

The auditors are planning an audit engagement for a new client in a business that is unfamiliar to the auditors. Which of the following would be the most useful source of information for the auditors during the preliminary planning stage when they are trying to obtain a general understanding of audit problems that might be encountered?

Choices:

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Client manuals of accounts and charts of accounts.

-

Established Industry Audit Guides.

-

Prior-year working papers of the predecessor auditors.

-

Latest annual and interim financial statements issued by the client.

Response: Prior-year working papers of the predecessor auditors.

Correct answer: Prior-year working papers of the predecessor auditors.

Why is it important for the auditor to obtain an understanding of the entity’s business processes?

Choices:

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To assess how transactions are initiated, recorded, processed, and reported

-

To evaluate the competence of the client’s board of directors

-

To determine whether the client is in compliance with tax regulations

-

To identify immaterial errors in financial reporting

Correct answer: To assess how transactions are initiated, recorded, processed, and reported

Which of the following statements is not correct about materiality?

Choices:

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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

-

Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgments

-

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

-

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.

Correct answer: 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.

Which of the following tasks is most likely to be performed by an audit partner?

Choices:

-

Analyzing a client’s key financial ratios

-

Assessing the quality of the client’s internal controls

-

Performing substantive tests of key balance sheet accounts

-

Reviewing the working papers

Correct answer: Reviewing the working papers

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

Choices:

-

Obtain an understanding of the entity's risk assessment process.

-

Identify specific internal control activities designed to prevent fraud.

-

Evaluate the reasonableness of the entity's accounting estimates.

-

Perform cutoff tests of the entity's sales and purchases.

Correct answer: Obtain an understanding of the entity's risk assessment process.

Which of the following statements is incorrect about audit planning documentation?

Choices:

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Although the precise form and content of the overall audit plan (overall audit strategy) may vary, it should sufficiently be detailed to guide the development of an audit program.

-

The audit plan and related audit program are not connected and should no longer be changed once the audit has started.

-

The audit program should set out the nature, timing and extent of planned audit procedures required to implement the overall audit plan.

-

In preparing audit program, the auditor should consider the specific assessments of inherent and control risks and the required level of assurance to be provided by substantive tests.

Correct answer: The audit plan and related audit program are not connected and should no longer be changed once the audit has started.

Materiality thresholds for accounting errors should be established for each financial statement element.  However, they

Choices:

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Must require correction of accounting errors in the subsequent year’s records.

-

Lead to rejection of financial statements found with unrecorded accounting records.

-

Tend to hamper objectivity of auditor’s judgment concerning severity of errors.

-

Must be established prior to execution of audit procedures.

Correct answer: Must be established prior to execution of audit procedures.

Which of the following is not a typical objective of the client’s organization?

Choices:

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Eliminating the competition

-

Producing reliable financial reports

-

Compliance with laws and regulations

-

Effectiveness and efficiency of operations

Correct answer: Eliminating the competition

Why does an auditor typically conduct a plant tour during the planning stage of the audit?

Choices:

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To gain an understanding of operations and identify potential audit risks

-

To inspect every item in the inventory for valuation purposes

-

To observe how financial statements are prepared

-

To assess the competence of the accounting staff

Correct answer: To gain an understanding of operations and identify potential audit risks