Q1: Review of Audit Process

The preparation of audit program and audit planning memo is the responsibility of the client’s

• Management

• Independent auditor

• Internal auditor

• Expert

In planning an audit engagement, the auditor is required to develop and document a(an)

• Flowchart and Overall Audit Strategy

• Overall Audit Plan and Flowchart

• Overall Audit Plan and Overall Audit Strategy

• Overall Audit Plan, Flowchart, and Overall Audit Strategy

As it relates to an audit, materiality is

• Not taken into consideration

• Related only to the sufficiency of procedures performed

• Based upon audit fees

• Determined based upon the importance to a user of the financial statements

When planning an examination, an auditor should

• Consider whether the extent of substantive tests may be reduced based on the results of the internal control questionnaire

• Make preliminary judgments about materiality levels for audit purposes

• Conclude whether changes in compliance with prescribed control procedures justifies reliance on them

• Prepare a preliminary draft of the management representation letter

Detection risk

• The risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated

• The risk that a misstatement, that could occur in an account balance or class of transactions and that could be material individually or when aggregated with misstatements in other balances or classes, will not be prevented or detected and corrected on a timely basis by the accounting and internal control systems

• The risk that an auditor’s substantive procedures will not detect a misstatement that exists in an account balance or class of transactions that could be material, individually or when aggregated with misstatements in other balances or classes

• The susceptibility of an account balance or class of transactions to misstatement that could be material, individually or when aggregated with misstatements in other balances of classes, assuming that there were no related internal controls

When discussing control risk (CR) and the audit risk model, which of the following is false?

• CR is a measure of the auditor’s assessment of the likelihood that misstatements will not be prevented or detected by internal control

• If the auditor concludes that internal control is completely ineffective to prevent or detect errors, he/she would assign a low value (e.g., 0%) to CR

• The relationship between control risk and detection risk is inverse

• The relationship between control risk and evidence needed to support account balances is direct

In the audit risk model, its risk components are determined, assessed, or manipulated. Which of the following risks are controllable by the auditor?

• Inherent risk

• Detection risk

• Control risk

• One of the given choices

Materiality is least important to an external auditor in determining the:

• Effect on independence of his direct financial interest in the client

• Extent of his audit of certain accounts

• Effects of exceptions upon his opinion in the audit report

• Specific transactions which should require a detailed review

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

• Materiality is determined by reference to PICPA guidelines

• 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

In planning an examination, the auditor would consider all of the following matters, except

• Anticipated reliance on internal controls

• Preliminary judgment about materiality levels for audit purposes

• Financial statements items likely to require adjustment

• The kind of opinion (unqualified, qualified, disclaimer, or adverse), likely to be given