Audit Planning

Question 1

What audit decisions might be influenced by the auditor’s preliminary judgment of materiality?

Answer 1

1. Which accounts to test.
2. Which items within a population to test.
3. Which client locations to visit.
4. Which differences to investigate while performing analytical procedures.

Question 2

What is the goal of a financial statement audit?

Answer 2

To reduce audit risk to a reasonably low level.

Question 3

Audit risk is a function of what three variables?

Answer 3

1. Inherent risk
2. Control risk
3. Detection risk

Question 4

What factors influence inherent risk?

Answer 4

1. Size of account balance
2. Complexity of accounting rules.
3. Complexity of mathematical calculations
4. Judgment or estimates involved
5. Unusual/nonroutine transactions
6. Susceptibility of assets to theft

Question 5

What two steps does the auditor perform to assess control risk?

Answer 5

1. Evaluate the design of the internal control system

2. Test whether the controls are being followed

Question 6

What is the relationship between risk of material misstatement and detection risk?

Answer 6

An inverse relationship. When RMM is high, the auditor must take actions to reduce detection risk.

Question 7

What actions can an auditor take to reduce detection risk?

Answer 7

1. Increase the number of transactions tested
2. Test closer to the Balance Sheet date
3. Use more experienced personnel
4. Gather more reliable evidence

Question 8

During what two stages of the audit is the auditor required to perform analytical procedures?

Answer 8

1. During the planning stage.

2. During the overall review stage

Question 9

What is the purpose of performing analytical procedures during the planning stage of the audit?

Answer 9

To identify unusual transactions and suspicious account balances.

Question 10

What is the purpose of performing analytical procedures during the overall review stage of the audit?

Answer 10

To evaluate the overall fairness of the financial statements and to assess the entity’s ability to continue as a going concern.

Question 11

What is the purpose of performing analytical procedures as a substantive test?

Answer 11

To gather evidence about whether account balances are fairly stated.

Question 12

What three methods may an auditor use to form an expectation about an account balance, and which method produces the most/least reliable estimates?

Answer 12

1. Trend analysis (least reliable)
2. Ratio analysis
3. Model-building (most reliable)