AUDIT PLANNING

The auditors shall obtain understanding of the following, except:

• A. The measurement and review of the entity’s financial performance

• B. Relevant industry, regulatory and other external factors including the applicable financial reporting framework

• C. The entity’s selection and application of accounting policies, including the reasons for changes thereto.

• D. The predecessor auditor’s working papers and judgment on materiality levels.

Auditor considers internal control to:

• A. Determine asset safeguarding.

• B. Suggest improvements.

• C. Plan audit procedures.

• D. Express an opinion.

Misappropriation of assets excludes:

• A. Treasurer diverting customer payments, overstating expenses.

• B. Employee stealing inventory recorded as shrinkage.

• C. Salesperson stealing P1,000 from the cash register and later paying for goods.

• D. Management changing inventory count tags to overstate ending inventory.

If an auditor suspects illegal acts, they should:

• A. Consult counsel to determine how to communicate the acts to shareholders.

• B. Extend auditing procedures to assess the material effect on financials.

• C. Inquire with management about the circumstances and evidence.

• D. Notify the audit committee and request their advice.

Materiality is best described as:

• A. Typically measured as a fixed percentage of assets.

• B. Typically measured as a fixed percentage of net income.

• C. Dependent solely on the auditor’s discretion.

• D. A cutoff point where judgment based on financials may be altered.

A benefit of determining materiality in the initial planning stage is not:

• A. Fine-tuning audit work for effectiveness and efficiency.

• B. Avoiding unnecessary work.

• C. Deciding early what kind of audit opinion to give.

• D. Avoiding too little work.

Materiality is least important when determining:

• A. Scope of audit on specific accounts.

• B. Effects of audit exceptions on opinion.

• C. Specific transactions to review.

• D. Effects of direct financial interest on independence.

Statement I. Materiality has an inverse relationship with detection risk.   Statement II. If the inherent risk and control risk is assessed to be low, materiality may be set at a high level.

• A. True, True

• B. False, True

• C. False, False

• D. True, False

Before relying on the system of internal control, the auditor obtains a reasonable degree of assurance that the internal control procedures are in use and operating as planned. The auditor obtains this assurance by performing

• A. Substantive tests

• B. Transaction tests

• C. Compliance tests/Tests of controls

• D. Tests of trends and ratios

Statement I. When both the inherent risk and control risk are assessed to be high, the detection risk should be set at a low level. This could be achieved by the auditor by examining a lesser sample size for substantive procedures.  Statement II. Increasing the extent of an audit procedure is effective only if the audit procedure itself is relevant to the specific risk.

• A. Both statements are true

• B. Both statements are false.

• C. Only Statement I is true.

• D. Only Statement II is true.