At++quizzer+6+-+planning+and+risk+assessment.pdf

DE LA SALLE UNIVERSITY MANILA RVR – COB DEPARTMENT OF ACCOUNTANCY INTTHRY 2nd Term AY 17 - 18 AT Quizzer 6

Prof. Francis H. Villamin

“Planning” 1. Planning an audit involves I. Establishing the overall audit strategy for the engagement II. Developing an audit plan a. I only b. II only c. Both I and II d. Neither I nor II 2. Which of the following activities should be performed by the auditor at the beginning of the current audit engagement? I. Perform procedures regarding the continuance of the client relationship and the specific audit engagement. II. Evaluate compliance with the requirements of the Code of Ethics for Professional Accountants in the Philippines, including independence. III. Establish an understanding of the terms of the engagement. a. I and II only b. II and III only c. I and III only d. I, II, and III 3. Adequate planning helps to ensure that

Appropriate attention is devoted to important areas of the audit Potential problems are identified and resolved on a timely basis The audit engagement is properly organized and managed

a.

b.

c.

d.

No

Yes

Yes

No

Yes

Yes

No

No

Yes

Yes

No

No

4. Which of the following statements concerning audit planning is incorrect? a. Planning is a discrete phase of an audit. b. Planning is a continual and iterative process. c. In a recurring audit, planning often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement. d. In planning an audit, the auditor considers the timing of certain planning activities and audit procedures that are to be completed prior to the performance of further audit procedures. 5. In performing an audit of financial statements, the auditor should obtain a sufficient knowledge of a client’s business and industry to a. Develop an attitude of professional skepticism concerning management’s financial statement assertions. b. Make constructive suggestions concerning improvements to the client’s internal control. c. Evaluate whether the aggregation of known misstatements causes the financial statements taken as a whole to be materially misstated. d. Understand the events and transactions that may have an effect on the client’s financial statements. 6. Which of the following is the least likely procedure to be performed in planning a financial statement audit? a. Selecting a sample of sales invoices for comparison with shipping documents. b. Coordinating the assistance of entity personnel in data preparation. c. Reading the current year’s interim financial statements. d. Discussing matters that may affect the audit with firm personnel responsible for non audit services to the entity.

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7. The establishment of an overall audit strategy or plan involves I. Determining the characteristics of the engagement that define its scope. II. Ascertaining the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required. III. Considering the important factors that will determine the focus of the engagement team’s efforts. a. I and II only b. II and III only c. I and III only d. I, II and III 8. Which of the following should be included in the audit plan? I. The nature, timing and extent of planned risk assessment procedures, as determined under PSA 315 (Identifying and Assessing the Risks of Material Misstatement through Understanding the Entity and its Environment) II. The nature, timing and extent of planned further audit procedures at the assertion level, as determined under PSA 330 (The Auditor’s Responses to Assessed Risks) a. I only b. II only c. Both I and II d. Neither I nor II 9. Which of the following matters would an auditor least likely to consider when setting the direction of the audit? a. The selection of the engagement team and the assignment of audit work to the team members. b. The engagement budget which includes consideration of the appropriate amount of time to allot for areas where there may be higher risks of material misstatement. c. The availability of client personnel and data. d. The manner in which the auditor emphasizes to engagement team members the need to maintain a questioning mind and to exercise professional skepticism in the gathering and evaluation of audit evidence. 10. Which of the following matters would an auditor most likely consider when establishing the scope of the audit? a. The expected audit coverage, including the number and locations of the entity’s components to be included. b. The entity’s timetable for reporting, such as at interim and final stages. c. The discussion with the entity’s management concerning the expected communications on the status of audit work throughout the engagement and the expected deliverables resulting from the audit procedures. d. Audit areas where there is a higher risk of material misstatement. 11. In the planning stage of an audit engagement, the auditor is required to perform audit procedures to obtain an understanding of the entity and its environment, including its internal control. These procedures are called a. Risk assessment procedures b. Substantive tests c. Tests of controls d. Dual-purpose tests 12. In planning the audit engagement, the auditor should consider each of the following except a. The kind of opinion (unqualified, qualified, or adverse) that is likely to be expressed. b. The entity’s accounting policies and procedures. c. Matters relating to the entity’s business and the industry in which it operates. d. Materiality level and audit risk. 13. Audit programs are modified to suit the circumstances of particular engagements. A complete audit program usually should be developed a. When the engagement letter is prepared. b. After obtaining an understanding of the control environment and control activities components of the entity’s internal control. c. After the auditor has obtained an understanding of the entity and its environment, including its internal control and assessed the risks of material misstatement. d. Prior to beginning the actual audit work.

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14. In designing written audit programs, an auditor should establish specific audit objectives that relate primarily to the a. Selected audit techniques b. Cost-benefit or gathering audit evidence c. Timing of audit procedures d. Financial statement assertions 15. An audit program should be designed for each individual audit and should incorporate steps and procedures to a. Detect and eliminate fraud of any type. b. Gather sufficient amount of management information available. c. Provide assurances that the objectives of the audit are satisfied. d. Insure that only material items are audited. 16. Which of the following is an aspect of scheduling and controlling the audit engagement? a. Including in the engagement letter an estimate of the minimum and maximum audit fee. b. Writing a conclusion in individual working papers indicating how the results of the audit will affect the auditor’s report. c. Performing audit work only after the entity’s books have been closed for the period under audit. d. Including in the audit program a column for budgeted and actual time. 17. In connection with the planning phase of an audit engagement, which of the following statements is always correct? a. Final staffing decisions must be made prior to completion of the planning stage. b. Observation of inventory count should be performed at year-end. c. A portion of the audit of a continuing audit client can be performed at interim dates. d. An engagement should not be accepted after the client’s financial year-end. 18. In planning an audit of an new client, an auditor most likely would consider the methods used to process accounting information because such methods a. Influence the design of internal control b. Affect the auditor’s preliminary judgment about materiality level c. Assist in evaluating the planned audit objectives d. Determine the auditor’s acceptance level of audit risk 19. Which of the following statements is incorrect? a. The auditor should obtain an understanding of the entity and its environment, including its internal control , sufficient to identify and assess the risk of material misstatement of the financial statements, whether due to fraud or error, and sufficient to design and perform further audit procedures. b. The auditor uses professional judgment to determine the extent of the understanding required of the entity and its environment, including its internal control c. The depth of the overall understanding that is required by the auditor in performing the audit is more than that possessed by management in managing the entity d. The performance of risk assessment procedures is a continuous dynamic process of gathering, updating, and analyzing information throughout the audit 20. The following statements relate to business risk. Select the incorrect statement: a. Business risk is broader than the risk of material misstatement b. Most business risks do not have financial consequences, though they may have an effect on the financial statements of an entity c. Usually, management identifies business risks and develops approaches to address them d. Smaller entities often do not set their objectives and strategies, or manage the related business risks, through formal plans or processes 21. Which of the following procedures is not performed as part of planning an audit engagement? a. Reviewing the working papers of the prior year. b. Performing analytical procedures. c. Tests of control. d. Designing an audit program.

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22. Which of the following procedures would an auditor least likely perform in planning a financial statement audit? a. Coordinating the assistance of entity personnel in data preparation. b. Discussing matters that may affect the audit with firm personnel responsible for non-audit services to the entity. c. Selecting a sample of vendors’ invoices for comparison to receiving reports. d. Reading the current year’s interim financial statements. 23.

Which of the following is an effective audit planning and control procedure that helps prevent misunderstanding and inefficient use of audit personnel? a. Make copies, for inclusion in the working papers, of those client supporting documents examined by the auditor. b. Arrange to provide the client with copies of the audit programs to be used during the audit. c. Arrange preliminary conference with the client to discuss audit objectives, fees, timing and other information. d. Arrange to have the auditor prepare and post any necessary adjusting or reclassification entries prior to final closing.

24.

Which of the following is the correct order of steps in the audit process? a. Perform tests of control b. Develop an overall strategy for the expected conduct and scope of the audit. c. Obtain client’s written representation. d. Prepare engagement letter. e. Perform substantive tests. f. Review and make preliminary evaluation of internal control. a. b. c. d.

D, F, A, B, E, C D, B, C, F, A, E D, B, F, A, E, C D, F, B, C, A, E

25. External auditors should develop and record a plan for each engagement. The planning process should include all the following except a. Establishing engagement objectives and scope of work b. Obtaining background information about he activities to be reviewed c. Identifying sufficient information to achieve engagement objectives d. Determining how, when and to whom the engagement results will be communicated 26. An outside consultant is developing methods for the management of a city’s capital facilities. An appropriate scope of an engagement to evaluate the consultant’s product is to a. Review the consultant’s contract to determine its propriety b. Establish the parameters of the value of the items being managed and controlled c. Determine the adequacy of the risk management and control systems for the management of capital facilities d. Review the handling of idle equipment 27. Documentation required to plan an internal auditing engagement should include information that a. Resources needed to complete the engagement were considered b. Planned engagement work will be completed on a timely basis c. Intended engagement observations have been clearly identified d. Internal audit activity resources are efficiently and effectively employed 28. Which of the following is least likely to be placed on the agenda for discussion at a preengagement meeting? a. Purpose and scope of the engagement b. Records and client personnel needed c. Sampling plan and key criteria d. Expected starting an completion dates 29. One of the primary roles of an engagement work program is to a. Serve as a tool for planning and conducting engagement work b. Document an internal auditor’s evaluation of controls c. Provide for a standardized approach to the engagement d. Assess the risk associated with the activity under review

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30. Engagement work programs testing controls should a. Be tailored for each operation evaluated b. Be generalized to fit all situations without regard to departmental lines c. Be generalized so as to be usable at all locations of a particular department d. Reduce costly duplication of effort by ensuring that every aspect of an operation is examined 31. Which of the following is not considered among the benefits of audit planning? a. Audit planning helps coordinate the work to be done by auditors of components and other parties such as experts, specialists, etc. b. Audit planning helps ensure that the audit is properly organized, managed and performed in an effective and efficient manner c. Audit planning aids in ensuring the examination of financial statements can be performed without problems and difficulties d. Audit planning helps ensure that appropriate attention is devoted to important areas of the audit 32. Which of the following procedures is not undertaken by the auditor at the beginning of the current audit engagement? a. Determines whether ethical requirements including independence are complied with b. Establishes an understanding of the terms of engagement c. Determines whether relationship with client can be continued or not d. Determines the types of opinion that should be expressed on the financial statements 33. Which of the following is not considered by the auditor when establishing the scope of the audit engagement? a. The financial reporting framework on which the financial information to be audited has been prepared b. Industry-specific reporting requirements c. Expected audit coverage including the number and locations of components to be included d. Expected nature and timing of communications among engagement team members including the nature and timing of team meetings and timing of the review of work performed 34. Which of the following should be considered by the auditor when ascertaining the reporting objectives of the engagement, the timing of the audit and the nature of communications required? a. Availability of client personnel and data b. Effect of information technology on the audit procedures c. Audit areas where there is a higher risk of material misstatement d. The entity’s timetable of reporting such as at interim and final stages 35. The auditor should plan the nature, timing and extent of direction and supervision of engagement team members and review of their work. Which of the following factors need not be considered by the auditor in preparing this plan? a. Size and complexity of the entity b. The reporting currency to be used, including any need for currency translation for the financial information audited c. The capabilities and competence of personnel performing the audit work d. The risks of material misstatement 36. For initial audits, additional matters the auditor may consider in the overall audit strategy and audit plan include the following except a. Confirmation of material accounts receivable balance at the end of the year b. Planned audit procedure to obtain sufficient appropriate audit evidence regarding opening balances c. Assignment of firm personnel with appropriate levels of capabilities and competence to respond to anticipated significant risks d. Major issues including the application of accounting principles or any auditing and reporting standards 37. In determining the number of people who will be assigned to an engagement, an auditor normally considers the following except a. Audit size and complexity b. The availability of the work of internal auditors and the extent of the auditor’s potential reliance on such work c. Availability and experience of personnel d. The necessity for special expertise

AT Quizzer 6

”Planning and Risk Assessment”

6

38. In considering the work to be performed by other auditors, the following should be taken into account except a. The involvement of experts b. The number of locations c. The involvement of other auditors in the audit of components such as subsidiaries, branches and divisions d. The expected use of audit evidence obtained in prior audits 39. A time budget is an estimate of the total hours an audit is expected to take. The following are among the factors to be considered in developing the budget, except a. Location of client facilities b. Client’s size as indicated by its gross assets, sales, number of employees c. The competence and experience of available staff d. Whether the audit is performed during the interim or at year-end 40. When planning an examination, an auditor should: a. Consider whether the extent of substantive tests may be reduced based on the results of the internal control questionnaire b. Make preliminary judgments about materiality levels for audit purposes c. Conclude whether changes in compliance with prescribed control procedures justifies reliance on them d. Prepare a preliminary draft of the management representation letter 41. With respect to the auditor’s planning of a year-end examination, which of the following statements is always true? a. An engagement should not be accepted after the fiscal year-end b. An inventory count must be observed at the balance sheet date c. The client’s audit committee should not be told of any specific audit procedures which will be performed d. It is an acceptable practice to carry out parts of the examination at interim dates 42. Franz requested permission to communicate with the predecessor auditor and review certain portions of the predecessor auditor’s working papers. The prospective client’s refusal to permit this will bear directly on Solis’ decision concerning the: a. Adequacy of the preplanned audit program b. Ability to establish consistency in application of accounting principles between years c. Apparent scope limitation d. Integrity of management 43. The auditor faces a risk that the examination will not detect material misstatements in the financial statements. In regard to minimizing this risk, the auditor primarily relies on: a. Substantive tests b. Tests of controls c. Internal control d. Statistical analysis 44. An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and inventories would most likely be identified in the planning phase of the audit by the use of: a. Tests of transactions and balances b. An assessment of internal control c. Specialized audit programs d. Analytical procedures 45. As the acceptable level of detection risk decreases, the assurance directly provided from a. substantive tests should increase b. substantive tests should decrease c. tests of controls should increase d. tests of controls should decrease 46. As the acceptable level of detection risk decreases, an auditor may change a. timing of substantive tests by performing them at an interim date rather than 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 amount

AT Quizzer 6

”Planning and Risk Assessment”

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47. Which of the following elements underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting? a. Internal control b. Corroborating evidence c. Quality control d. Materiality and relative risk 48. One of the first things that the auditor will do after accepting a new client is a. tour client’s facilities b. contact client’s attorney to discover legal obligations c. study client’s internal control structure d. communicate with predecessor auditor 49. Which of the following is not a document or record that should be examined early in the engagement? a. Corporate charter and bylaws b. Management letter c. Minutes of board of directors’ and stockholders’ meetings d. Contracts 50. Client acceptance and retention policies and procedures do not include a. Evaluating firm’s independence with potential client b. Obtaining and reviewing information about company c. Permission of the predecessor auditor d. Considering whether engagement requires special skills 51. Which of the following is not considered among the benefits of audit planning? a. Audit planning helps coordinate the work to be done by auditors of components and other parties such as experts, specialists, etc. b. Audit planning helps ensure that the audit is properly organized, managed and performed in an effective and efficient manner c. Audit planning aids in ensuring the examination of financial statements can be performed without problems and difficulties d. Audit planning helps ensure that appropriate attention is devoted to important areas of the audit 52. Which of the following procedures is not undertaken by the auditor at the beginning of the current audit engagement? a. Determines whether ethical requirements including independence are complied with b. Establishes an understanding of the terms of engagement c. Determines whether relationship with client can be continued or not d. Determines the types of opinion that should be expressed on the financial statements 53. Which of the following should be considered by the auditor when ascertaining the reporting objectives of the engagement, the timing of the audit and the nature of communications required? a. Availability of client personnel and data b. Effect of information technology on the audit procedures c. Audit areas where there is a higher risk of material misstatement d. The entity’s timetable of reporting such as at interim and final stages 54. The auditor should plan the nature, timing and extent of direction and supervision of engagement team members and review of their work. Which of the following factors need not be considered by the auditor in preparing this plan? a. Size and complexity of the entity b. The reporting currency to be used, including any need for currency translation for the financial information audited c. The capabilities and competence of personnel performing the audit work d. The risks of material misstatement 55. For initial audits, additional matters the auditor may consider in the overall audit strategy and audit plan include the following except a. Confirmation of material accounts receivable balance at the end of the year b. Planned audit procedure to obtain sufficient appropriate audit evidence regarding opening balances c. Assignment of firm personnel with appropriate levels of capabilities and competence to respond to anticipated significant risks d. Major issues including the application of accounting principles or any auditing and reporting standards

AT Quizzer 6

”Planning and Risk Assessment”

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56. In determining the number of people who will be assigned to an engagement, an auditor normally considers the following except a. Audit size and complexity b. The availability of the work of internal auditors and the extent of the auditor’s potential reliance on such work c. Availability and experience of personnel d. The necessity for special expertise 57. In considering the work to be performed by other auditors, the following should be taken into account except a. The involvement of experts b. The number of locations c. The involvement of other auditors in the audit of components such as subsidiaries, branches and divisions d. The expected use of audit evidence obtained in prior audits 58. The auditors will not ordinarily initiate discussion with the audit committee concerning the: a. Extent to which the work of internal auditors will influence the scope of the examination b. Extent to which change in the company’s organization will influence the scope of the examination c. Details of potential problems with the auditors believe might cause a qualified opinion d. Details of the procedures which the auditors intend to apply 59. When planning an examination, an auditor should: a. Consider whether the extent of substantive tests may be reduced based on the results of the internal control questionnaire b. Make preliminary judgments about materiality levels for audit purposes c. Conclude whether changes in compliance with prescribed control procedures justifies reliance on them d. Prepare a preliminary draft of the management representation letter 60. One of the first things that the auditor will do after accepting a new client is a. tour client’s facilities b. contact client’s attorney to discover legal obligations c. study client’s internal control structure d. communicate with predecessor auditor 61. Which of the following is not a document or record that should be examined early in the engagement? a. Corporate charter and bylaws b. Management letter c. Minutes of board of directors’ and stockholders’ meetings d. Contracts 62. Which of the following would not be found in the corporate charter? a. The date of incorporation b. The kinds and amount of capital stock authorized c. The rules and procedures adopted by the stockholders d. The types of business activity that the corporation is allowed to conduct 63. During the planning phase when the auditor is examining the contracts of client, the primary attention should focus on a. large peso value items b. any aspect of the agreement affecting financial disclosure c. tracing the information to verify correct journal entries d. the discovery of related party transactions 64. A CPA is conducting the first examination of a non-public company’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 render an unqualified opinion d. unacceptable because the CPA should bring an independent viewpoint to a new engagement

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”Planning and Risk Assessment”

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65. The auditor should carefully consider the competence of the auditee’s employees because their competence deals directly and importantly upon the a. cost/benefit relationship of the system of internal control b. achievement of the objectives of the system of internal control c. comparison of recorded accountability with assets d. timing of the tests to be performed 66. Analytical procedures used in planning an audit should focus on a. Evaluating the adequacy of evidence gathered concerning unusual balances b. Testing individual account balances that depend on accounting estimates c. Enhancing the auditor’s understanding of the client’s business d. Identifying material weaknesses in the internal control structure 67. A benefit obtained from comparing client’s data with industry average is that it provides a. an indication of the likelihood of financial failure b. an indication where errors exist in the statements c. a benchmark to be used in evaluating client’s budgets d. a comparison of “what is” with “what should be” 68. The most common statistical technique used with analytical procedures is a. Disaggregated data b. Regression analysis c. A decision rule table d. Comparison of current-year with prior-year data looking for large peso or large percentage changes 69. Where an unusual fluctuation is indicated by analytical procedures and management is unable to provide a satisfactory explanation, the auditor must assume that there is a high probability that an error or irregularity exists. In this case, the auditor must a. Issue either a qualified or an adverse opinion b. Issue a disclaimer c. Issue either a qualified opinion or a disclaimer d. Design other appropriate audit procedures to determine if such errors do exist 70. In connection with the examination of financial statements by an independent auditor, the client suggests the members of the internal audit staff be utilized to minimize audit costs. Which of the following tasks could most appropriately be delegated to the internal audit staff? a. Selection of accounts receivable for confirmation, based upon the internal auditor’s judgment as to how many accounts and which accounts will provide sufficient coverage b. Preparation of schedules for negative accounts receivable responses c. Evaluation of the internal control of accounts receivable and sales d. Determination of the adequacy of the allowance for doubtful accounts

Establishment of Materiality and Risk Assessment” 1. In planning an engagement, the internal auditor should establish objectives and procedures to address the risk associated with the activity. Risk is defined as a. The possibility that the balance or class of transactions and related assertions contains misstatements that could be material to the financial statements b. The uncertainty of the occurrence of an event that could affect the achievement of objectives c. The failure to adhere to organizational policies, plans and procedures or to comply with relevant laws and regulations d. The failure to accomplish established objectives and goals for operations or programs 2. The reliance placed on substantive tests in relation to the reliance placed on internal control varies in a relationship that is ordinarily a. Parallel b. Inverse c. Direct d. Equal

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3. After performing a study and evaluation of the client’s system of internal control an auditor has concluded that the system is well designed and is functioning as anticipated. Under these circumstances the audit would most likely a. Cease to perform further substantive tests b. Not increase the extent of predetermined substantive tests c. Increase the extent of an anticipated analytical review procedures d. Perform all compliance tests to the extent outlined in the preplanned audit program 4. With respect to the auditor’s planning of a year-end examination, which of the following statements is always true? a. An engagement should not be accepted after the fiscal year ends b. An inventory count must be observed at the balance sheet date c. The client’s audit committee should not be told of the specific audit procedures which will be performed d. It is an acceptable practice to carry out substantial parts of the examination at interim dates 5. At interim dates, an auditor evaluates a client’s internal accounting control procedures and finds them to be effective. The auditor performs a substantial part of the audit engagement in a continuous basis throughout the year. At a minimum, the auditor’s year-end audit procedures must include a. Determination that the client’s internal accounting control procedures are still effective at yearend b. Confirmation of those year-end accounts that were examined at interim dates c. Tests of compliance with internal control in the same manner as those tests made at the interim dates d. Comparison of the responses to the auditor’s internal control questionnaire with a detailed flowchart at year-end 6. Which of the following statements is not correct? a. Materiality is relative rather than an absolute concept b. Normally, the most important base used as the criterion for deciding materiality is Net Income c. Qualitative factors as well as quantitative factors affect materiality d. Given equal peso amounts, irregularities are usually considered more important than errors 7. Regardless of how the allocation of the preliminary judgment about materiality was done, when the audit is completed the auditor must be confident that the combined errors in all accounts are a. Less than the preliminary judgment b. Equal to the preliminary judgment c. More than the preliminary judgment d. Less than or equal to the preliminary judgment 8. Which of the following statements about the cycle approach to auditing is not correct? a. There are differences among cycles in the frequency and size of expected errors b. There are differences among cycles in the effectiveness of the internal control structure c. There are differences among cycles on the auditor’s willingness that material errors exist after auditing is completed d. It is common for auditors to want an equally low likelihood of errors for each cycle after the auditor is finished 9. When a different extent of evidence is needed for various cycles, the difference is caused by a. Errors in the client’s accounting system b. Client’s need to achieve an unqualified opinion c. The auditor’s need to follow PSAs. d. The auditor’s expectations of errors and assessment of the control structure 10. Which one of the following factors is not a good indicator of potential financial failure? a. Client is constantly short of cash and working capital b. Client’s retained earnings were reduced by half as a result of a large dividend payout c. Client relies heavily on debt financing, especially by financing permanent assets with shortterm loans d. Client has had increasing net losses for several years

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”Planning and Risk Assessment”

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11. Which of the following is not a consideration when auditor is attempting to assess the inherent risk? a. Nature of the client’s business b. Existence of related parties c. Frequency and intensity of top management’s review of the accounting transactions and records d. Susceptibility to defalcation 12. Which of the following discoveries by the auditor would not raise the red flag of increased inherent risk? a. Management bonuses are based on percentage of net income b. A bond indenture requires a current ratio of at least three to one c. Client makes extensive use of notes receivable and notes payable rather than buying and selling an open account d. Client is a parent company subsidiary 13. The auditor sets both control risk and inherent risk. On a typical engagement, the author would not set both of these for a. The overall audit b. Each cycle c. Each account d. Each objective 14. After obtaining and understanding of an entity’s internal control structure and assessing control risk, an auditor may next a. Perform tests of controls to verify management’s assertions that are embodied in the financial statements b. Consider whether evidential matter is available to support a further reduction in the assessed level of control risk c. Apply analytical procedures as substantive tests to validate the assessed level of control risk d. Evaluate whether the internal control structure policies and procedures detected material misstatements in the financial statements 15. When conducting an audit that arouse suspicion of fraud should be given greater attention than other errors. This is an example of applying the criterion of a. Reliability of evidence b. Materiality c. Risk d. Dual-purpose testing 16. The audit risk against which the auditor requires reasonable protection is a combination of two separate risks. The first of these is that material errors will occur in the accounting process by which the financial statements are developed, and the second is that a. A company’s system of internal control is not adequate to detect errors and irregularities b. Those errors that occur will not be detected in the auditor’s examination c. Management may possess an attitude that lacks integrity d. Evidential matter is not competent enough for the auditor to form an opinion based on reasonable assurance 17. Which of the following procedures is not performed as part of planning an audit engagement? a. Reviewing the working papers of the prior year b. Performing analytical procedures c. Tests of controls d. Designing an audit program 18. Which of the following is not generally considered a financial statement audit risk factor? a. Top management dominates management operating and financing decisions b. A new client with no prior audit history c. Rate of change in the entity’s industry is rapid d. Profitability of the entity relative to its industry is inconsistent

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19. Which of the following statements is correct regarding the auditor’s determination of materiality? a. The planning level of materiality will normally be the larger of the amount considered for the balance sheet vs. the income statement b. The auditor’s planning level of materiality may be disaggregated into smaller “tolerable misstatements” for the various accounts c. Auditors may use various rules of thumb to arrive at an evaluation level of materiality, but not for determining the planning level of materiality d. The amount used for the planning will equal that used for evaluation 20. The system approach to an audit is least likely to be appropriate for a. Clients with weak internal control b. Clients that is large in size c. Clients in specialized industries d. Clients that are publicly held 21. Which of the following income statements is least likely to be verified in conjunction with the audit of a balance sheet account? a. Depreciation expense b. Interest revenue c. Travel and entertainment d. Uncollectible accounts expense 22. Materiality should be considered by the auditor when a. Determining the nature, timing and extent of auditor’s procedures b. Evaluating the effect of misstatements c. Both a and b d. Neither a nor b 23. The type of transactions that ordinarily have a high inherent risk because they involve management judgments or assumptions are referred to as a. estimation transactions b. non-routine transactions c. routine transactions d. related-party transactions 24. Which of the following descriptions best describes inherent risk? a. Auditors fail to discover a material misstatement in the course of their audit and do not modify their audit opinion b. A company’s internal control fails to identify a material misstatements in a timely fashion c. Auditing procedures fail to find a material misstatement d. The possibility that a material misstatement will occur in any given account before considering internal control 25. While performing an audit, Manuel decides to restrict then risk of misstatement to 3%. What must the acceptable level of detection risk be if inherent risk is 25% and control risk is 40%? a. 0.3% b. 30% c. 12% d. 33.3% 26. How frequently must an auditor test operating effectiveness of controls that appear to function as they have in past years and on which the auditor wishes to rely in the current year? a. Monthly b. Each audit c. At least every second audit d. At least every third audit 27. An auditor may decide to assess control risk at the maximum level for certain assertions because the auditor believes a. Control policies and procedures are unlikely to pertain to the assertions b. The entity’s control environment, accounting system, and control procedures are interrelated c. Sufficient evidential matter to support the assertions is likely to be available d. More emphasis on tests of controls than substantive tests is warranted

AT Quizzer 6

”Planning and Risk Assessment”

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28. The auditor faces a risk that the examination will not detect material errors which occur in the accounting process. In regard to minimizing this risk, the auditor primarily relies on a. Substantive tests b. Compliance tests c. Internal control d. Statistical analysis 29. 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 sizes d. Assurances provided by substantive tests to a lower level 30. The auditor should perform which of the following as risk assessment procedures? a. Analytical procedures b. Confirmation c. Recalculation d. Reperformance 31. The concepts of audit risk and materiality are interrelated and must be considered together by the auditor. Which of the following is true? a. Audit risk is the risk that the auditor may unknowingly express a modified opinion when in fact the financial statements are fairly stated b. The phrase in the auditor’s standard report “present fairly, in all material respects, in conformity with generally accepted accounting principles” indicates the auditor’s belief that the financial statements taken as a whole are not materially misstated c. If misstatements are not important individually but are important in the aggregate, the concept of materiality does not apply d. Material fraud but not material errors cause financial statements to be materially misstated 32. In financial statement audit, inherent risk represents the a. Susceptibility of an account balance to error that could be material b. Risk that error could occur and not be prevented or detected by the internal control structure c. Risk that error could occur and not be detected by the auditor’s procedures d. Risk that the auditor fails to modify materiality misstated financial statements 33. Which of the following statements about internal control is correct? a. Properly maintained internal controls reasonably assure that collusion among employees cannot occur b. Establishing and maintaining internal control is the internal auditor’s responsibility c. Exceptionally strong control allows the auditor to eliminate substantive tests of details d. The cost-benefit relationship should be considered in designing internal controls 34. When an organization has strong internal control, management can expect various benefits. The benefit least likely to occur is a. Reduced cost of an external audit b. Elimination of employee fraud c. Improvement in the reliability and integrity of information for decision-making purposes d. Some assurance of compliance with governmental regulations 35. A potential business risk created by regulatory requirement may most likely include a. Increased product liability b. Increased legal exposure c. The entity does not have the personnel or expertise to deal with the changes in the industry d. Loss of financing due to the entity’s inability to meet financing requirements 36. Which of the following conditions and events may least likely indicate the existence of risks of material misstatements? a. Significant transactions with related parties b. Entities or business segments likely to be sold c. Significant amount of routine or systematic transactions d. Changes in key personnel including departure of key executives

AT Quizzer 6

”Planning and Risk Assessment”

14

37. The auditor should determine overall responses to address the risks of material misstatement at the financial statement level. Such responses most likely include a. Assigning less experienced staff b. Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating audit evidence c. Performing predictable further audit procedures d. Performing substantive procedures at an interim date instead of at period end 38. An independent auditor should perform tests of controls or those internal accounting controls: a. That materially affects financial statement balances b. That he plans to rely upon c. Where instance of noncompliance were noted d. That he relied on the prior year’s audit 39. The probability that an auditor will give an inappropriate opinion on financial statements is a. Audit risk b. Inherent risk c. Control risk d. Detection risk 40. Auditors would appear not to exhibit due audit care if there was a a. high audit risk b. low detection risk c. high inherent risk d. low control risk 41. An auditor who believes that a material irregularity may exist should initially a. Withdraw from the engagement b. Discuss the matter with higher level of management c. Discuss the matter with those believed to be involved in the perpetration of the material irregularity d. Consult legal counsel 42. Investigation of new clients and reevaluation of existing ones is an essential part of deciding a. inherent risk b. acceptable audit risk c. statistical risk d. financial risk 43. 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 44. Research has indicated several factors which affect business risk and therefore acceptable risk. Which of the following does not affect business risk? a. The degree to which external users rely on the statements b. The likelihood that client will have financial difficulties after the audit report is issued c. The integrity of management d. Weaknesses in client’s internal control structure 45. The audit risk against which the auditor requires reasonable protection is a combination of two separate risks. The first of these is that material errors will occur in the accounting process by which the financial statements are developed, and the second is that a. a company’s system of internal control is not adequate to detect errors and irregularities b. those errors that occur will not be detected in the auditor’s examination c. management may possess an attitude that lacks integrity d. evidential matter is not competent enough for the auditor to form an opinion based on reasonable assurance

AT Quizzer 6

”Planning and Risk Assessment”

15

46. Which of the following statements concerning materiality thresholds is incorrect? a. Aggregate materiality thresholds are a function of the auditor’s preliminary judgment concerning audit risk b. In general, the more misstatements the auditor expects, the higher should be the aggregate materiality threshold c. The smallest aggregate level of errors or fraud that could be considered material to any of the financial statements is referred to as a “materiality threshold” d. Materiality thresholds may change between the planning and review stages of the audit. These changes may be due to quantitative and/or qualitative factors 47. Which of the following factors best describe the materiality of audit risk? 1. Volume of transactions 2. Degree of system integration 3. Years since last audit 4. Significant management turnover 5. Value of assets at risk 6. Average value per transaction 7. Results of last audit a. 1 through 7 b. 2, 4 and 7 c. 1, 5 and 6 d. 3, 4 and 6 48. Which of the following concepts about materiality is incorrect? a. Materiality is directly related to the acceptable level of detection risk b. Materiality does not apply if internal control is highly effective c. Materiality is a matter of professional audit judgment d. Materiality is more closely related to fieldwork and reporting standards than to general standards 49. Which type of audit risk does the management of a company have the most control over in the short term? a. Inherent risk b. Control risk c. Detection risk d. Sufficiency risk 50. Auditors would perform the following steps in which order? a. Determine audit risk; assess control risk; determine detection risk; set materiality b. Set materiality; determine audit risk; assess control risk; determine detection risk c. Set materiality; assess control risk; determine detection risk; determine audit risk d. Determine audit risk; set materiality; assess control risk; determine detection risk 51. As the audit progresses and additional information about the client is obtained, the acceptable level of audit risk a. may be modified b. may not be reduced because it would become statistically invalid, but it may be increased c. may not be increased because it would become statistically invalid, but it may be reduced d. may not be modified 52. Which of the following is not a consideration when the auditor is attempting to assess the inherent risk? a. Nature of client’s business b. Existence of related parties c. Frequency and intensity of top management’s review of the accounting transactions and records d. Susceptibility to defalcation 53. Which of the following is an example of the concept of inherent risk? a. Humans make more errors than computers, therefore a manual accounting system is riskier than a computerized system b. Accounting systems with vouchers have many more controls built in, so the risk that there will be errors on the financial statements is reduced c. Loans receivable for a finance company are less likely to be collectible than those of a bank d. Audits with larger sample sizes are less risky than those with smaller sizes

AT Quizzer 6

”Planning and Risk Assessment”

16

54. Which of the following discoveries by the auditor would not raise the red flag of increased inherent risk? a. Management bonuses are based on a percentage of net income b. A bond indenture requires a current ratio of at least three to one c. Client makes extensive use of notes receivable and notes payable rather than buying and selling on open account d. Client is a parent company with a subsidiary 55. Inherent risk is reduced where the likelihood of defalcation is low. This would be true for an account such as a. Inventory b. Marketable securities c. Cash d. Accounts receivable 56. Both control risk and inherent risk are set by the auditor. On a typical engagement, the auditor would not set both of these for a. the overall audit b. each cycle c. each account d. each objective 57. Because control risk and inherent risk vary from cycle to cycle, account to account or objective to objective, a. acceptable audit risk must remain a constant b. detection risk and required audit evidence will also vary c. detection risk will vary but audit evidence will remain constant d. detection risk will remain constant but audit evidence will vary 58. After obtaining an understanding of an entity’s internal control structure and assessing control risk, an auditor may next a. perform tests of controls to verify management’s assertions that are embodied in the financial statements b. consider whether evidential matter is available to support a further reduction in the assessed level of control risk c. apply analytical procedures as substantive tests to validate the assessed level of control risk d. evaluate whether the internal control structure policies and procedures detected material misstatements in the financial statements 59. An auditor may compensate for a weakness in the internal control by increasing the a. level of detection risk b. extent of tests of controls (compliance tests) c. preliminary judgment about audit risk d. extent of analytical procedures 60. When conducting an audit, errors that arouse suspicion of fraud should be given greater attention than other errors. This is an example of applying the criterion of a. reliability of evidence b. materiality c. risk d. dual-purpose testing 61. When an independent auditor’s examination of financial statement discloses special circumstances that make the auditor suspect that material errors and irregularities may exist, the auditor’s initial course of action should be to a. recommend that the client pursue the suspected fraud to a conclusion that is agreeable to the auditor b. extend normal audit procedures in an attempt to detect the full extent of the suspected fraud c. reach an understanding with the proper client representative as to whether the auditor or the client is to make the investigation necessary to determine if a fraud has in fact occurred d. decide whether the fraud, if in fact it should exist, might be of such a magnitude as to affect the auditor’s report on the financial statements

AT Quizzer 6

”Planning and Risk Assessment”

17

62. The audit risk against which the auditor requires reasonable protection is a combination of two separate risks. The first of these is that material errors will occur in the accounting process by which the financial statements are developed, and the second is that a. a company’s system of internal control is not adequate to detect errors and irregularities b. those errors that occur will not be detected in the auditor’s examination c. management may possess an attitude that lacks integrity d. evidential matter is not competent enough for the auditor to form an opinion based on reasonable assurance 63. A CPA may reduce the audit work on a first-time audit by reviewing the working papers of the predecessor auditor. The predecessor should permit the successor to review working papers relating to matters of continuing accounting significance such as those that relate to a. extent of reliance on the work of specialists b. fee arrangement and summaries of payments c. analysis of contingencies d. staff hours required to compete the engagement 64. Which of the following procedures is not performed as a part of planning an audit engagement? a. Reviewing the working papers of the prior year b. Performing analytical procedures c. Tests of controls d. Designing an audit program 65. The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as: a. Account risk b. Control risk c. Detection risk d. Inherent risk 66. Which of the following is not generally considered a financial statement audit risk factor? a. Management operating and financing decisions are dominated by top management b. A new client with no prior audit history c. Rate of change in the entity’s industry is rapid d. Profitability of the entity relative to its industry is inconsistent 67. The risk that the auditor’s procedures will lead them to conclude that a material misstatement does not exist in an account balance when in fact such a misstatement does exist is referred to as : a. Account risk b. Control risk c. Detection risk d. Inherent risk 68. Which of the following statements is correct regarding the auditor’s determination of materiality? a. The planning level of materiality will normally be the larger of the amount considered for the balance sheet vs. the income statement b. The auditor’s planning level of materiality may be disaggregated into smaller “tolerable misstatements” for the various accounts c. Auditors may use various rules of thumb to arrive at an evaluation level of materiality, but not for determining the planning level of materiality d. The amount used for the planning will equal that used for evaluation 69. The auditors must consider materiality in planning an audit engagement. Materiality for planning purpose is: a. The auditor’s preliminary estimate of the largest amount of error that would be material to any one of the client’s financial statements b. The auditor’s preliminary estimate of the smallest amount of error that would be material to any one of the client’s financial statements c. The auditor’s preliminary estimate of the amount of error that would be material to the client’s balance sheet d. An amount that cannot be quantitatively stated since it depends on the nature of the item 70. Research has indicated several factors which affect business risk and therefore acceptable risk. Which of the following does not affect business risk? a. The degree to which external users rely on the statements b. The likelihood that client will have financial difficulties after the audit report is issued c. The integrity of management d. Weaknesses in client’s internal control structure.

AT Quizzer 6

”Planning and Risk Assessment”

18