Auditing and Assurance Services

Polytechnic University of the Philippines Audit Planning College of Accountancy 1) 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 program c) Audit procedures d) Audit working papers 2) Audit plans should I. Precede actions II. Be flexible III. Be cost beneficial a) II and III only b) I and III only c) All of the statements above d) All of the statements above except I 3) Adequate planning of the audit work helps ensure that I. Appropriate attention is devoted to important areas II. All misstatements will be detected III. Potential problems are identified IV. The work is completed expeditiously a) All statements above b) II and IV only c) I, III and IV d) I and III 4) Which of the following procedures would a CPA ordinarily perform during audit planning? a) Obtain understanding of the clients business and industry b) Review the clients bank reconciliation c) Obtain clients representation letter d) Review and evaluate clients internal control 5) In developing the overall audit plan for a new client, factor not to be considered is a) Materiality levels b) The clients business, including the structure of the organization and accounting systems used c) The amount of estimated audit fee d) The audit risks and procedures to be performed to achieve audit objectives 6) In planning the audit engagement, the auditor should consider each of the following except a) Matters relating to the entitys business and the industries in which it operates b) The entitys accounting policies and procedures c) Anticipated levels of control risk and materiality d) The kind of opinion that is likely to be expressed 7) A CPA is conducting the first examination of a clients financial statements. The CPA hopes to reduce the audit work by consulting with the predecessor auditor and reviewing the predecessors 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 auditors work c) Required if the CPA is to render an unqualified opinion d) Unacceptable because the CA should bring an independent viewpoint to a new engagement Understanding the entity and its environment 8) 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 entitys business 9) In performing an audit of financial statements, the auditor should have or obtain a knowledge of the clients 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 10) Each of the following may be relevant to an auditor when obtaining knowledge about the clients business and industry except a) Discussion with people within or outside the entity b) Publications related to the industry c) Visits of the entitys premises d) Performing a walkthrough tests 11) To obtain an understanding of a continuing clients business in planning an audit, an auditor most likely would a) Perform tests of details of transactions and balances b) Review prior years working papers and the permanent file for the client c) Read specialized industry journals d) Re-evaluate the clients internal control system 12) Which of the following statements is correct, when obtaining understanding about the clients 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 industry must be obtained after accepting the engagement to determine whether the auditor has the necessary knowledge to perform the audit Page 1 of 6 eeb.6.30.2013

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Polytechnic University of the Philippines Audit Planning College of Accountancy c) Following the acceptance of the engagement, the auditor should obtain detailed knowledge about the clients business preferably at the start of the engagement d) For continuing engagements, the auditor may no longer obtain knowledge about the clients business 13) Information about the clients business appropriately assists the auditor in: I. Assessing risk and identifying potential problems II. Planning and performing the audit effectively and efficiently III. Evaluating audit evidence a) All of the above statements b) I and III only c) II nad III only d) I and II only 14) For initial engagements, PSA 510 does not required the auditor to obtain evidence a) That the opening balances do not contain material misstatements that materially affect the current periods financial statements b) That the prior periods ending balances have been correctly brought forward to the current period or when appropriate, have been restated c) That appropriate accounting policies are consistently applied or changes in accounting policies have been properly accounted for and adequately disclosed d) That the prior period financial statements were audited by an independent CPA Materiality 15) 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 16) 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 acceptable 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 auditors consideration of materiality is influenced by the auditors perception of the needs of a reasonable person who will rely on the financial statements 17) 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 18) 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) Average of these levels c) Largest aggregate level d) Smallest aggregate level 19) 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 20) Tolerable misstatement is the term used to indicate materiality at the a) Balance sheet level b) Account balance level c) Income statement level d) Company-wide level 21) All else being equal, as the level of materiality decreases, the amount of evidence required will a) Remain the same b) Change in an unpredictable fashion c) Decrease d) Increase 22) In considering materiality for planning purposes, an auditor believes that misstatements aggregating P 100,000 would have a m aterial effect on an entitys income statement, but those misstatements would have to aggregate P 200,000 to materially affect the balance sheet. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate a) P 100,000 b) P 200,000 c) P 150,000 d) P 300,000 23) Which of the following would an auditor most likely use in determining the auditors preliminary judgment about materiality? a) The anticipated sample size of the planned substantive tests b) The entity annualized interim financial statements c) The results of the internal control questionnaire d) The contents of the management representation letter Page 2 of 6 eeb.6.30.2013

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Polytechnic University of the Philippines Audit Planning College of Accountancy 24) The concept of materiality with respect to the attest function 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 misstatements d) Requires the auditor to make judgment as to whether misstatements affect the fairness of the financial statements 25) The relationship between materiality and risk is ordinarily a) Direct b) Parallel c) Inverse d) None 26) 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 materiality 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 materiality for evaluating purposes to be based on net income 27) When assessing materiality levels for audit purposes, the auditor should consider the Amount involved Nature of misstatement a) Yes Yes b) Yes No c) No No d) No Yes Audit Risk 28) The risk that the auditor may express an incorrect opinion on the financial statements is called a) Inherent risk b) Detection risk c) Control risk d) Audit risk 29) The susceptibility of an account to misstatements assuming no internal control is referred to as the a) Inherent risk b) Detection risk c) Control risk d) Audit risk 30) Audit risk consists of all but the following components a) Inherent risk b) Substantive risk c) Detection risk d) Control risk 31) 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 32) 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 is inherent risk. The second risk is that material misstatements will not be prevented or detected by internal control. The third risk is 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 33) 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 34) 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 them in an appropriate manner 35) The audit risk model is used primarily a) For planning purposes in determining how much evidence to accumulate b) While doing tests of controls c) To determine the type of opinion to express d) To evaluate the evidence which has been gathered 36) 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 Page 3 of 6 eeb.6.30.2013

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Audit Planning

d) Can be changed at the auditors discretion 37) Which of the following is incorrect statement? a) Detection risk cannot be changed at the auditors discretion b) If individual audit risk remains the same, detection risk bears an inverse relationship to inherent & control risks c) The greater the inherent & control risks the auditor believes exist, the less detection risk that can be accepted d) The auditor might make separate or combined assessments of inherent risk and control risk 38) 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 39) Relationship between control risk and detection risk is ordinarily a) Parallel b) Direct c) Inverse d) Equal 40) Which of the following conditions supports an increase in detection risk? 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 sales revenue is weak d) Study of the business reveals that the client recently acquired a new company in an unrelated industry 41) An auditor uses the assessed level of control risk to a) Evaluate the effectiveness of the entitys internal control policies and procedures b) Identify transactions and account balances whether inherent risk is at 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 42) 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 43) What is the magnitude of audit risk if inherent risk is .50, control risk is .40 and detection risk .10? a) .20 b) .04 c) .10 d) .02 44) An inherent risk (IR) of 40% and a control risk of (CR) 60% affect planned detection risk and planned evidences differently than an a) IR of 60% and CR of 40% b) IR of 80% and CR of 30% c) IR of 100% and 24% d) IR of 70% and CR of 30% 45) 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 recoding 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 46) 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 using larger sample sizes c) Assurance provided by substantive tests to a lower level 47) 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 that at year-end b) Nature of substantive tests from a less effective to a more effective procedure 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 48) As the acceptable level of detection risk decreases, an auditor may a) Reduce substantive testing by relying on the assessment of inherent 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 considerations as a planning factor d) Lower the assessed level of control risk 49) 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 is substantially the same as the planned audit risk level, the auditor would a) Decrease substantive testing b) Increase inherent risk Page 4 of 6 eeb.6.30.2013

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Polytechnic University of the Philippines College of Accountancy

Audit Planning

50)

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c) Decrease detection risk d) Increase materiality levels Which of the following statement is not true about the auditors 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 assessment of inherent risk is influenced by the condition of the clients accounting and internal control system The auditor should obtain sufficient understanding of the entity and its environment, including its internal control 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 According to PSA 315, Risk assessment procedures means a) Identifying business risks relevant to financial reporting objectives and deciding about actions to address those risks b) Obtaining understanding of entity and its environment, including its internal control c) Performing substantive tests and testing the operating effectiveness of the entitys internal control d) Discussing with the members of the audit team the susceptibility the entitys financial statements to material misstatements 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 clients procedures Which of the following is incorrect about the auditors risk assessment procedures? a) Obtaining understanding control, is a continuous, dynamic process of gathering, updating and analyzing information throughout the audit b) In performing risk assessment procedures, the auditor may obtain disclosures and related assertions, and about the operating effectiveness of controls, even though such procedures are not specifically planned as substantive tests or test of controls c) The auditor should perform substantive procedures and tests of controls after the risk assessment procedures are performed d) Obtaining understanding of internal control is not normally sufficient to serve as testing the operating effectiveness of the control

Analytical procedures 55) These consists of the analysis of significant ratios and trends including the resulting investigation of fluctuation 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 56) Analytical procedures used as of risk assessment procedures are performed primarily to assist the auditor in a) Identifying areas that may represent specific risks b) Obtaining knowledge about the design of internal control c) Obtaining knowledge about the operating effectiveness of the clients internal control d) Gathering corroborative evidence about the validity of an account balance 57) A basic premise underlying analytical procedure is that a) These procedures cannot replace tests of balances and transactions b) Statistical tests of financial information may lead to the discovery of material misstatements in the financial statements c) The study of financial ratios is an acceptable alternative to the investigation of unusual fluctuations d) Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary 58) One reason why an auditor makes an analytical review of the clients operations is to identify a) Improper separation of accounting and other financial duties b) Weakness of material nature in the system of internal accounting control c) Unusual transactions d) Non-compliance with prescribed control procedures 59) Significant unexpected differences identified by analytical procedures will usually necessitate a (an) a) Consistency explanatory paragraph added to the audit report b) Review of the internal control structure c) Explanation in the representation letter d) Auditor investigation 60) Which of the following statements about analytical procedures is incorrect? a) Analytical procedures are required to be performed in the planning phase of the audit b) Analytical procedures are required to be done during the testing phase of the audit c) Analytical procedures are required to be done during the completion phase of the audit d) Analytical procedures may be performed in the planning, testing and completion phases of the audit 61) Analytical procedures are used for the following purposes except a) To assist the auditor in planning the nature, timing and extent of other auditing procedures b) As a substantive test to obtain evidential matter about particular assertion related to account balances or classes of transactions c) As an overall review of financial information in the final review stage of the audit d) To evaluate the effectiveness of the clients internal control 62) For all audits of financial statements made in accordance with PSAs, the use of analytical procedures is required to some extent Page 5 of 6 eeb.6.30.2013

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Polytechnic University of the Philippines Audit Planning College of Accountancy In the planning stage As substantive test In the review stage a) Yes No Yes b) Yes Yes No c) Yes Yes Yes d) Yes No No 63) Analytical procedures used in planning an audit should focus on identifying: a) Material weaknesses in the internal control structure b) The predictability of financial data from individual transactions c) The various assertions that are embodied in the financial statements d) Areas that may represent specific risk relevant to the audit 64) To help plan the nature, timing and extent of substantive auditing procedures, preliminary analytical procedures should focus a) Enhancing the auditors understanding of the clients business and events that have occurred since the last audit date b) Developing plausible relationships that corroborate anticipated results with a measurable amount of precision c) Applying ratio analysis to externally generated data such as published industry statistics or price indices d) Comparing recorded financial information to the results of other tests of transactions and balances 65) Analytical procedures enable the auditor to predict the balance or quantity for an item under audit, information to develop this estimate can be obtained from all of the following except a) Tracing transactions through the system to determine whether procedures are being applied or prescribed b) Comparison of financial data with data for comparable prior periods, anticipated results(e.g., budgets and forecasts), and similar data for the industry in which the entity operates c) Study of the relations of elements of financial data that would be expected to confirm to a predictable patter based upon the entitys experience d) Study of the relationships of financial data with relevant non-financial data 66) An example of an analytical procedure is the comparison of a) Financial information with similar information regarding the industry in which the entity operates b) Recorded amounts of major disbursements with appropriate invoices c) Results of statistical sample with the expected characteristics of the actual population d) CIS generated data with similar data generated by a manual accounting system 67) Which of the following is not a typical analytical review procedure? a) Study of relationships of the financial information with relevant non-financial information b) Comparison of the financial information with similar information regarding the industry in which the entity operates c) Comparisons of recorded amounts of major disbursements with appropriate invoices d) Comparison of the financial information with budgeted amounts Planning documentation 68) In developing the overall audit plan and audit program, the auditor should assess inherent risk at the: Audit plan Audit program a) Financial statement level Account balance level b) Account balance level Financial statement level c) Account balance level Account balance level d) Financial statement level Financial statement level 69) In developing written audit programs, an auditor should establish specific audit objectives that relate primarily to the a) Timing of audit procedures b) Selected audit techniques c) Cost-benefit of gathering evidence d) Financial statements assertions 70) An auditor should design the written audit program so that a) All material transactions will selected for substantive testing b) Substantive tests prior to the balance sheet data will be minimized c) The audit procedures selected will achieve specific audit objectives d) Each account balance will be tested under tests of controls or tests of transactions 71) An audit program should be designed for each individual audit and should include audit steps and procedures to a) Detect and eliminate all fraud b) Increase the amount of management information available c) Provide assurance that the objectives of the audit are met d) Insure that only material items are audited 72) Which of the following statement is incorrect about the planning documentation? a) The audit plan and related programs should no longer be changed once the audit is stated b) Although the precise form and consent of the audit plan may vary, it should be sufficiently detailed to guide the development of an audit program c) The audit program should set out the nature, timing and extent of planned audit procedures required to implement overall audit plan d) In preparing an 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 73) Which of the following matters would least likely appear in the audit program? a) Specific procedures that will be performed b) Specific audit objectives c) Estimated time that will be spent in performing certain procedures d) Documentation of the accounting and internal control systems being reviewed

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