A2 M5 - Planning (notes)

Question 1

During the initial planning phase of an audit, the auditor most likely would:

A.Option A.
Discuss the timing of the audit procedures with the client’s management.

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

C.Option C.
Evaluate the reasonableness of the client’s accounting estimates.

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

Answer 1

Choice “A” is correct. Procedures that an auditor may consider in planning the audit include discussing the type, scope, and timing of the audit with the client’s management.

Choice “B” is incorrect. Inquiring of the client’s attorney is not a planning activity. It is part of the evidence gathered later in the audit process.

Choice “C” is incorrect. Evaluating the reasonableness of the client’s accounting estimates is not a planning activity. It is part of the evidence gathered later in the audit process.

Choice “D” is incorrect. Identifying specific control activities that are likely to prevent fraud is an audit procedure, but not an initial planning activity.

Question 2

In developing an overall audit strategy, an auditor should consider:

A.Option A.
Preliminary evaluations of materiality, audit risk, and controls.

B.Option B.
Whether the inquiry of the client’s attorney identifies any litigation, claims, or assessments not disclosed in the financial statements.

C.Option C.
Findings from substantive tests performed at interim dates.

D.Option D.
Whether the allowance for sampling risk exceeds the achieved upper precision limit.

Answer 2

Choice “A” is correct. In developing an overall audit strategy, an auditor should consider preliminary evaluations of materiality, audit risk, and controls.

Choice “B” is incorrect. Inquiry of a client’s attorney and evaluation of the attorney’s response is performed during fieldwork, after the planning process has been completed.

Choice “C” is incorrect. Findings from interim audit testing would be considered during fieldwork, after the planning process has been completed.

Choice “D” is incorrect. Evaluation of results from sampling applications would be performed during fieldwork, after the planning process has been completed.

Question 3

The audit engagement team is in the process of planning the upcoming audit for a new client. As part of the planning phase, the auditors would perform all of the following activities with the exception of:

A.Option A.
Developing an audit strategy.

B.Option B.
Performing risk assessment procedures.

C.Option C.
Obtaining knowledge of the client’s business and industry.

D.Option D.
Sampling a small number of client transactions for planned audit procedures.

Answer 3

Choice “D” is correct. The auditors would not begin sampling client transactions until after the planning phase (in the fieldwork phase). During the planning phase, the auditors would obtain knowledge of the client’s business and industry, perform risk assessment procedures, develop an audit strategy, and develop an audit plan (not included as an answer choice above).

Choice “A” is incorrect. Developing an audit strategy (and audit plan) are key activities performed by the auditors in the planning phase of an audit.

Choice “B” is incorrect. The auditors would perform risk assessment procedures during the planning phase as a means to obtain a further understanding of the client and its control environment. The auditors’ goal is to assess the risks of material misstatement in order to eventually develop the audit procedures that will be used in the client audit.

Choice “C” is incorrect. It is important that the auditors develop an understanding of a new client’s business and industry during the planning phase.

Question 4

Which of the following factors would generally not be taken into account when determining the extent of supervision needed for the staff?

A.Option A.
The knowledge, skill, and ability of each engagement team member.

B.Option B.
The risk of material misstatement in the audit.

C.Option C.
The fee to be paid by the client.

D.Option D.
The size and complexity of the company.

Answer 4

Choice “C” is correct. The fee to be paid by the client should not be taken into consideration when determining the extent of supervision needed for the staff. The extent of supervision should be determined after taking into account the nature of the company, the nature of the work assigned to each engagement team member, the risk of material misstatement, and the knowledge, skill, and ability of each engagement team member.

Choice “A” is incorrect. The knowledge, skill, and ability of each engagement member should be taken into consideration when determining the extent of supervision needed for the staff.

Choice “B” is incorrect. The risk of material misstatement in the audit should be taken into consideration when determining the extent of supervision needed for the staff.

Choice “D” is incorrect. The size and complexity of the company should be taken into consideration when determining the extent of supervision needed for the staff.

Question 5

Joe Smith has been promoted to audit supervisor prior to an upcoming audit of a large existing client. Assuming that Smith is assigned five assistants for the client audit, his supervisory duties may include all of the following, except for:

A.Option A.
Assuming primary responsibility for all phases of the client audit.

B.Option B.
Reviewing the work performed by his assistants to determine adequacy and whether the audit objectives were met.

C.Option C.
Staying informed with his assistants regarding audit issues or difficulties encountered with the client.

D.Option D.
Communicating to his assistants the susceptibility of the client’s financial statements to material misstatement due to error or fraud.

Answer 5

Choice “A” is correct. The engagement partner (not the audit supervisor) has the primary responsibility for the client audit.

Choice “B” is incorrect. This represents a key function of the audit supervisor that is performed during and after the audit fieldwork phase.

Choice “C” is incorrect. The audit supervisor should be aware of any audit issues or difficulties encountered with the client to determine if intervention is required.

Choice “D” is incorrect. This is an important duty of the audit supervisor early on in the audit fieldwork phase.

Question 6

The auditor with final responsibility for an engagement and one of the assistants have a difference of opinion about the results of an auditing procedure. If the assistant believes it is necessary to be disassociated from the matter’s resolution, the CPA firm’s procedures should enable the assistant to:

A.Option A.
Discuss the disagreement with the entity’s management or its audit committee.

B.Option B.
Report the disagreement to an impartial peer review monitoring team.

C.Option C.
Refer the disagreement to the AICPA’s Auditing Standards Board.

D.Option D.
Document the details of the disagreement with the conclusion reached.

Answer 6

Choice “D” is correct. Each assistant has a professional responsibility to bring to the attention of the audit supervisor, disagreements or concerns the assistant might have with respect to accounting and auditing issues that he or she believes are of significance to the financial statements or auditor’s report. In addition, each assistant should have a right to document his or her disagreement if he or she believes it is necessary to be disassociated from the resolution of the matter.

Choice “A” is incorrect. Disagreements among an audit firm’s staff would generally be handled internally. Discussion of such matters with the client would be inappropriate.

Choice “B” is incorrect. Impartial peer review teams are primarily concerned with determining whether quality management policies and procedures are being effectively applied. Generally, they would not get involved with disagreements related to specific engagements.

Choice “C” is incorrect. The AICPA’s Auditing Standards Board issues standards for the audit and attest engagements, but is not responsible for getting involved in specific disagreements on engagements.

Question 7

During the end of a client audit, one member of the audit engagement team does not agree with the conclusion reached by the remaining audit team members on a key client accounting issue. Under this scenario, the dissenting auditor may take any of the following actions, except for:

A.Option A.
Consulting with the engagement partner on the matter.

B.Option B.
Disassociating from the audit conclusion in the event there is not an adequate resolution to the dispute.

C.Option C.
Accepting the engagement team’s conclusion despite reservation after orally discussing the concern with the audit supervisor.

D.Option D.
Requesting that his or her dissenting opinion be documented.

Answer 7

Choice “C” is correct. When there is a disagreement on an accounting or auditing issue at the end of the audit, the dissenting auditor should first consult with the engagement partner on this matter. If an adequate resolution is not obtained, the dissenting auditor should be allowed to disassociate from the resolution. The dissenting auditor should document their dissociation from the final accounting issue resolution. To accept the audit engagement team’s conclusion despite continued reservation on this accounting issue after an oral discussion with the audit supervisor is not an acceptable course of action.

Choice “A” is incorrect. This is the initial step that the dissenting auditor should take to attempt to resolve the accounting issue difference with the engagement team.

Choice “B” is incorrect. If an acceptable resolution is not obtained, the dissenting auditor should disassociate from the engagement’s team conclusion, which includes documenting the basis for the disassociation.

Choice “D” is incorrect. Documenting the dissenting auditor’s disagreement is an acceptable course of action under the above scenario.

Question 8

An auditor is required to obtain an understanding of the entity’s business, including business cycles and reasons for business fluctuations. What is the audit purpose most directly served by obtaining this understanding?

A.Option A.
To allow the auditor to more accurately perform tests of controls.

B.Option B.
To enable the auditor to accurately identify significant deficiencies.

C.Option C.
To assist the auditor to accurately interpret information obtained during an audit.

D.Option D.
To decide whether it will be necessary to perform analytical procedures.

Answer 8

Choice “C” is correct. As part of audit planning, the auditor should obtain an understanding of the entity’s business. This understanding enables the auditor to better understand events, transactions, and practices that may affect the financial statements, to plan and perform appropriate audit tests, and to properly understand and evaluate the results of those tests.

Choice “A” is incorrect. Obtaining an understanding of the entity’s business would not result in a more accurate performance of tests of controls. Accurate performance of audit tests is dependent upon factors such as existence of an appropriate audit trail, client cooperation, training and supervision of audit staff, etc.

Choice “B” is incorrect. Obtaining an understanding of the entity’s business would not be particularly helpful in identifying significant deficiencies. Significant deficiencies in internal control are typically identified during the fieldwork stage of the audit.

Choice “D” is incorrect. Analytical procedures are always required in an audit during the planning and overall review stages.

Question 9

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

A.Option A.
Determining the extent of involvement of the client’s internal auditors.

B.Option B.
Considering whether the client’s accounting estimates are reasonable in the circumstances.

C.Option C.
Examining documents to detect any noncompliance with laws and regulations having a material effect on the financial statements.

D.Option D.
Obtaining a written representation letter from the client’s management.

Answer 9

Choice “A” is correct. The auditor considers several factors in planning the nature, timing and extent of auditing procedures. One of these factors is the extent of involvement of the client’s internal auditors.

Choice “B” is incorrect. The auditor does obtain and evaluate evidence to support significant accounting estimates, but this occurs subsequent to initial planning.

Choice “C” is incorrect. The auditor does not perform tests to detect noncompliance with laws and regulations during the planning process.

Choice “D” is incorrect. Representation letters are obtained by the auditor at the end of the audit. The representation letter should not be dated earlier than the date of the auditor’s report.

Question 10

An auditor reviews a client’s accounting policies and procedures when considering which of the following planning matters?

A.Option A.
Preliminary judgments about materiality levels.

B.Option B.
Understanding the client’s operations and business.

C.Option C.
Nature of reports to be rendered.

D.Option D.
Method of sampling to be used.

Answer 10

Choice “B” is correct. An auditor would review the client’s accounting policies and procedures as part of obtaining an understanding of the client’s operations and business. This understanding is important because it affects the design of internal control, which in turn impacts planned auditing procedures.

Choice “A” is incorrect. The client’s accounting policies and procedures would not affect preliminary judgments about materiality, which are generally based on either annualized interim financial statements or annual financial statements from a prior period.

Choice “C” is incorrect. The client’s accounting policies and procedures would not affect the nature of reports to be rendered. The nature of reports to be rendered would be based on the type of engagement and the specific results of that engagement.

Choice “D” is incorrect. Although the auditor might consider the client’s accounting policies and procedures when designing a sampling plan, this is not the primary reason for the auditor’s review of the client’s policies and procedures.

Question 11

Which of the following procedures would an auditor most likely perform in the planning stage of an audit?

A.Option A.
Communicate management’s initial selection of accounting policies to the audit committee.

B.Option B.
Obtain written representations from management that there are no unrecorded transactions.

C.Option C.
Make a preliminary judgment about materiality.

D.Option D.
Confirm a sample of the entity’s accounts payable with known creditors.

Answer 11

Choice “C” is correct. During the planning stage of an audit, the auditor should make a preliminary assessment of materiality.

Choice “A” is incorrect. Audit committee communications can take place throughout the audit and not necessarily during the planning stage.

Choice “B” is incorrect. Written representations from management in the form of a representation letter are obtained at the end of the audit and not during the planning stage.

Choice “D” is incorrect. Confirmation procedures are substantive procedures and are not performed during the planning stage of the audit. Also, note that accounts payable are not typically tested through confirmations.

Question 12

Which of the following would not be a primary function of an audit strategy?

A.Option A.
Provide the scope of the audit.

B.Option B.
Outline reporting objectives.

C.Option C.
Provide a preliminary assessment of materiality and tolerable misstatement.

D.Option D.
Outline the nature, extent and timing of audit procedures.

Answer 12

Choice “D” is correct. Although the audit strategy and audit plan are linked together, the audit plan (not the audit strategy) outlines the nature, extent, and timing of the audit procedures that will be performed by the auditors on an engagement.

Choice “A” is incorrect. Providing for the scope of the audit is a primary function of the overall audit strategy.

Choice “B” is incorrect. The audit strategy would outline reporting objectives.

Choice “C” is incorrect. The audit strategy would include a preliminary assessment of materiality and tolerable misstatement for the current audit.

Question 13

In establishing the overall audit strategy for an audit of a nonissuer, an auditor should:

A.Option A.
Assess the risk of material misstatement and develop substantive procedures to mitigate the risk.

B.Option B.
Perform an internal control walk-through of the nonissuer to determine the type of audit procedures required.

C.Option C.
Form a conclusion on compliance with independence requirements that apply to the audit engagement.

D.Option D.
Plan the timing of the audit and the nature of the communications required based on the engagement’s reporting objectives.

Answer 13

Choice “D” is correct. The timing of the audit and the required communications are some of the items included in the audit strategy. While developing the audit strategy, the scope and reporting objectives of the audit are considered.

Choice “A” is incorrect. While the audit strategy includes a preliminary assessment of materiality, the risk of material misstatement is not determined until the audit performs a more thorough risk assessment.

Choice “B” is incorrect. An auditor will perform a walk-through of internal controls during the planning phase. The walk-through is performed to identify and assess risk.

Choice “C” is incorrect. An auditor will assess independence requirements and confirm compliance with independence regulations during engagement acceptance. This is done before the auditor develops the audit strategy.

Question 14

Which of the following activities would a CPA least likely perform during the planning stage of the audit?

A.Option A.
Communicate with those charged with governance.

B.Option B.
Determine the extent to which specialists will be used during the audit.

C.Option C.
Determine the effect that the use of information technology will have on the audit.

D.Option D.
Perform tests of controls to determine whether they are operating as designed.

Answer 14

Choice “D” is correct. Testing controls to determine whether they are operating as designed would be performed after the planning phase of the audit.

Choice “A” is incorrect. A CPA would communicate with those charged with governance regarding the planned scope and timing of the audit.

Choice “B” is incorrect. During the planning phase of the audit, a CPA would determine what staff would be assigned to the audit, which may include the use of specialists if the current staff does not possess the skills necessary to audit certain issues.

Choice “C” is incorrect. During the planning phase of the audit, a CPA would consider the level of information technology in the company and its effect on the audit.

Question 15

The audit plan usually cannot be finalized until the:

A.Option A.
Consideration of the entity’s system of internal control has been completed.

B.Option B.
Representation letter has been signed by the client.

C.Option C.
Significant deficiencies in internal control have been communicated to those charged with governance.

D.Option D.
Search for unrecorded liabilities has been performed and documented.

Answer 15

Choice “A” is correct. The auditor should obtain a sufficient understanding of the entity and its environment, including its system of internal control, to plan the audit of the entity’s financial statements.

Choice “B” is incorrect. The representation letter is not obtained until the end of the audit.

Choice “C” is incorrect. Informing those charged with governance of significant deficiencies in internal control generally occurs during or at the completion of the audit. It is not required before completion of the audit plan.

Choice “D” is incorrect. The search for unrecorded liabilities typically takes places after year-end, while the audit plan is prepared during planning. Information obtained from the search is not needed to finalize the audit plan.

Question 16

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

A.Option A.
An audit plan setting forth in detail the procedures necessary to accomplish the engagement’s objectives.

B.Option B.
A planning memorandum establishing the timing of the audit procedures and coordinating the assistance of entity personnel.

C.Option C.
A flowchart or narrative of the information system relevant to financial reporting describing the recording and classification of transactions for financial reporting.

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

Answer 16

Choice “A” is correct. In an audit conducted in accordance with GAAS, the auditor must document the audit plan, setting forth in detail the procedures necessary to accomplish the engagement’s objectives.

Choice “B” is incorrect. A planning memo, while recommended, is not required under GAAS.

Choice “C” is incorrect. Documentation of the auditor’s understanding of the client’s internal control is required, but may take different forms. A narrative, an internal control questionnaire, a flowchart, or simply a memorandum (for a small client) may be sufficient.

Choice “D” is incorrect. Documentation of the auditor’s understanding of the client’s system of internal control is required, but may take different forms: narrative, internal control questionnaire, flowchart, or simply a memorandum (for a small client) may be sufficient. In addition, controls do not assure the achievement of objectives.

Question 17

The engagement partner is in the process of creating an audit plan, which includes outlining which audit procedures to be performed in the current audit. In order to detect material misstatements, the auditor would use which of the following audit procedures?

A.Option A.
Risk assessment procedures.

B.Option B.
Substantive procedures.

C.Option C.
Test of controls.

D.Option D.
Other GAAS-related audit procedures.

Answer 17

Choice “B” is correct. The auditor would use substantive procedures to detect material misstatements. Substantive procedures include test of details and analytical procedures.

Choice “A” is incorrect. Risk assessment procedures are used by the auditor to obtain an understanding of the client and its environment. Once the risks of material misstatement are assessed, the auditor can determine the nature, extent, and timing of additional audit procedures.

Choice “C” is incorrect. Test of controls are used by the auditor to evaluate the operating effectiveness of existing controls in preventing or detecting material misstatements.

Choice “D” is incorrect. Other audit procedures may be performed to comply with GAAS.

Question 18

Which of the following is not a type of financial statement assertion?

A.Option A.
Rights and obligations.

B.Option B.
Fairness and accuracy.

C.Option C.
Valuation and allocation.

D.Option D.
Understandability of presentation and classification.

Answer 18

Question 19

Holding other planning considerations equal, a decrease in the amount of misstatements in a class of transactions that an auditor could tolerate most likely would cause the auditor to:

A.Option A.
Perform the planned auditing procedures closer to the balance sheet date.

B.Option B.
Apply the planned substantive tests prior to the balance sheet date.

C.Option C.
Increase the assessed level of control risk for relevant financial statement assertions.

D.Option D.
Decrease the extent of auditing procedures to be applied to the class of transactions.

Answer 19

Choice “A” is correct. A decrease in the amount of misstatements that the auditor can tolerate will cause the auditor to modify the nature, timing and/or extent of auditing procedures. Performing the planned procedures closer to the balance sheet date is a timing modification that addresses this change.

Choice “B” is incorrect. The auditor would perform substantive procedures before year-end if the amount of misstatements the auditor could tolerate were increased. The earlier in the year that the auditor performs substantive testing, the greater the incremental risk the auditor accepts regarding the year-end financial statements.

Choice “C” is incorrect. A change in the level of tolerable misstatement does not have a direct effect on the assessed level of control risk.

Choice “D” is incorrect. A decrease in the amount of misstatements that can be tolerated would necessitate an increase in the extent of auditing procedures.

Question 20

An auditor plans to apply substantive tests to the details of asset and liability accounts as of an interim date rather than as of the balance sheet date. The auditor should be aware that this practice:

A.Option A.
Potentially increases the risk that errors that exist at the balance sheet date will not be detected.

B.Option B.
Should be especially considered when there are rapidly changing economic conditions.

C.Option C.
Eliminates the use of certain statistical sampling methods that would otherwise be available.

D.Option D.
Presumes that the auditor will reperform the tests as of the balance sheet date.

Answer 20

Choice “A” is correct. Applying substantive tests to the details of asset and liability accounts as of an interim date increases risk, as it is possible that errors will occur between the date of interim testing and the balance sheet date. For this reason, the auditor generally selects for interim examination only accounts that are reasonably predictable with respect to amount, relative significance, and composition, and must also identify procedures sufficient to extend interim conclusions to year-end.

Choice “B” is incorrect. Generally, accounts selected for interim examination should be reasonably predictable with respect to amount, relative significance, and composition. Rapidly changing economic conditions might affect the valuation, significance, or composition of certain assets or liabilities, and therefore would make testing at interim less likely.

Choice “C” is incorrect. The use of statistical sampling methods is not affected by the timing of audit procedures.

Choice “D” is incorrect. Applying substantive tests to the details of asset and liability accounts as of an interim date increases risk, but it does not require all such tests to be reperformed. Instead, the auditor should perform procedures designed to extend the interim conclusions to year-end. Such procedures should be less in scope than the initial procedures performed at interim; otherwise, it would make more sense to have simply applied the more extensive tests at year-end in the first place.

Question 21

Before applying principal substantive tests to an entity’s accounts receivable at an interim date, an auditor should:

A.Option A.
Ascertain that accounts receivable are immaterial to the financial statements.

B.Option B.
Assess the difficulty in controlling the incremental audit risk.

C.Option C.
Project sampling risk at the maximum for tests covering the remaining period.

D.Option D.
Consider the likelihood of assessing the risk of incorrect rejection too low.

Answer 21

Choice “B” is correct. When audit procedures are performed before year-end, the auditor must assess the incremental risk involved and determine whether sufficient alternative procedures exist to extend the interim conclusions to year-end.

Choice “A” is incorrect. Interim testing may be performed on material accounts, as long as the auditor assesses the incremental risk involved and determines whether sufficient alternative procedures exist to extend the interim conclusions to year-end. Immaterial accounts would not need to be tested.

Choice “C” is incorrect. When audit procedures are performed before year-end, the auditor must assess the incremental risk involved, but this risk would not necessarily be assessed at the maximum level.

Choice “D” is incorrect. The risk of incorrect rejection relates to the efficiency of audit testing, since an item that is initially (and erroneously) rejected will be subject to additional audit testing that should correct the error. The likelihood of assessing this risk lower than it should be does not affect the auditor’s decision regarding the appropriate timing of audit work.

Question 22

Which of the following accounts would an auditor most likely test prior to the balance sheet date?

A.Option A.
Interest receivable.

B.Option B.
Short-term debt.

C.Option C.
Accrued liabilities.

D.Option D.
Maintenance and repairs expense.

Answer 22

Choice “D” is correct. Maintenance and repairs expense is a component of the statement of income and the amount reported includes the transactions that took place during the full period of the financial statements. Therefore, an auditor would likely begin testing transactions prior to the balance sheet date. An auditor is required, however, to determine whether sufficient procedures have been performed to extend any interim conclusions to year-end.

Choice “A” is incorrect. Interest receivable is a balance sheet account and is, therefore, reported as of a point in time (the balance sheet date). The components of the ending balance would not be known prior to the balance sheet date and, therefore, an auditor would not likely test this type of balance before the end of the period.

Choice “B” is incorrect. Short-term debt is a balance sheet account and is, therefore, reported as of a point in time (the balance sheet date). The components of the ending balance would not be known prior to the balance sheet date and, therefore, an auditor would not likely test this type of balance before the end of the period.

Choice “C” is incorrect. Accrued liabilities is a balance sheet account and is, therefore, reported as of a point in time (the balance sheet date). The components of the ending balance would not be known prior to the balance sheet date and, therefore, an auditor would not likely test this type of balance before the end of the period.

Question 23

In an audit of a nonissuer, the auditor plans to recalculate the nonissuer’s year-end employee vacation accrual using a management-provided list of employees’ salaries and banked vacation hours. In order to validate the completeness of the employees’ information, the auditor would most appropriately:

A.Option A.
Verify that the number of vacation hours accrued by each employee for each pay period complies with the corresponding policy from the human resources department.

B.Option B.
Use the payroll system to validate a sample of employee salaries.

C.Option C.
Review a list of employees who were terminated after year-end to verify that they have been removed from the vacation-accrual calculation.

D.Option D.
Agree the number of employees included in the vacation-accrual calculation to the final payroll register.

Answer 23

Choice “D” is correct. To test the completeness of the employees’ information in the vacation-accrual calculation, the auditor would likely verify that all the active employees are included in the calculation. Confirming that no employees are excluded tests the completeness of the employees.

Choice “A” is incorrect. Verifying the number of vacation hours for each employee tests the accuracy of the calculation, not the completeness. This procedure also does not test the employees’ information.

Choice “B” is incorrect. Using the payroll system to validate a sample of the employee salaries will test the accuracy of the salaries, but it does not address the completeness of the employees’ information.

Choice “C” is incorrect. Reviewing a list of employees who were terminated and making sure that they have been removed from the calculation tests the existence of the employees included in the calculation, not the completeness.

Question 24

Which type of audit procedures would an auditor use to test a client’s financial statement assertions at the account, transaction, or disclosure level?

A.Option A.
Substantive procedures (only).

B.Option B.
Test of controls (only).

C.Option C.
Substantive procedures and test of controls.

D.Option D.
Analytical procedures (only).

Answer 24

Choice “C” is correct. The auditor uses substantive procedures and tests of controls at the relevant assertion level to test a client’s significant account balances, transaction classes, and disclosure items in the financial statements.

Choice “A” is incorrect. While the auditor would use substantive procedures to test a client’s financial statement assertions, test of controls may also be performed.

Choice “B” is incorrect. Although an auditor may use test of controls as an audit procedure to test a client’s financial statement assertions, substantive procedures would also be used by the auditor.

Choice “D” is incorrect. Analytical procedures are a form of substantive procedures. There may be certain situations when using analytical procedures may be a more effective means of gathering evidence than tests of controls.

Question 25

In designing a written audit plan, an auditor should establish specific audit objectives that relate primarily to the: A.Option A. Cost-benefit of gathering evidence. B.Option B. Financial statement assertions. C.Option C. Selected audit techniques. D.Option D. Timing of audit procedures.

Answer 25

**Choice "B" is correct. In designing a written audit plan, an auditor should establish specific audit objectives that relate primarily to the financial statement assertions.** Choice "A" is incorrect. The cost-benefit of gathering evidence is an important consideration in establishing a written audit plan, but audit objectives are not based on such considerations. Choice "C" is incorrect. The specific audit objectives should relate primarily to financial statement assertions. Selected audit techniques are then developed in order to meet the identified objectives. Choice "D" is incorrect. Although the timing of audit procedures is an important consideration in designing a written audit plan, obtaining audit evidence relating to the financial statement assertions is the primary objective.

Question 26

Which of the following is a **false statement regarding the drafting or use of an audit plan?** A.Option A. An audit plan is required for new and existing client audit engagements. B.Option B. It serves as a work plan for the audit supervisor and assistants on an audit engagement. C.Option C. The audit plan specifies audit procedures necessary to accomplish audit objectives. D.Option D. The initial audit plan is rarely modified.

Answer 26

Choice "D" is correct. This is a false statement. Especially during the fieldwork stage of an audit engagement, the initial audit plan may need to be modified due to a response to changing conditions or the results of audit procedures already performed. Choice "A" is incorrect. An audit plan is required for every audit. Choice "B" is incorrect. The audit plan is an actual work plan for the supervising auditor and assistants on the audit engagement. Choice "C" is incorrect. The audit plan is effectively a blueprint to help guide the audit supervisor and his or her assistants to perform the necessary audit procedures to accomplish the audit objectives.

Question 27

When an auditor is designing and implementing an audit plan for an issuer, which of the following would introduce an element of unpredictability into the audit? A.Option A. Performing no interim testing B.Option B. Selecting the same items or procedures performed in prior years C.Option C. Performing procedures on an unannounced basis D.Option D. Assigning members to the audit team who are familiar with the client and the industry

Answer 27

**Choice "C" is correct. Performing procedures on an unannounced basis would introduce unpredictability into the audit, as management would not be able to anticipate the timing of the audit procedures.** Choice "A" is incorrect. Performing no interim testing would not introduce unpredictability, as management may be able to anticipate the timing of the audit procedures. Choice "B" is incorrect. Selecting the same items or procedures from prior years would not introduce unpredictability, as management may be able to anticipate the extent of the audit procedures performed. Choice "D" is incorrect. Using team members familiar with the client and industry would not introduce unpredictability, as management may be able to predict the nature of the audit procedures performed.