ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 41  May 2021 CPA Licensure Examination  Week No. 6

AUDITING (Auditing Theory) J. Ireneo  M. Ngina  F. Tugas  F. Yabut

AT-07: FS AUDIT PROCESS – AUDIT PLANNING

REQUIRED READINGS
 Chapter 7, Auditing and Assurance Principles, 2018 Edition
 Chapter 8, Auditing and Assurance Principles, 2018 Edition
 PSA 300 (Redrafted): Planning an Audit of Financial Statements
 PSA 315 (Redrafted): Identifying and Assessing The Risks of Material Misstatement Through Understanding The Entity
and Its Environment
 PSA 320 (Revised and Redrafted): Audit Materiality
 PSA Glossary of Terms

1. The purposes of planning the audit do not include:

I. To ensure appropriate attention is devoted to different areas of the audit
II. To identify potential problem areas
III. To facilitate delegation of work to audit team members
IV. To ensure the audit is completed within budget and time restraints
A. I and II C. III and IV
B. III D. IV

2. Which of the following statements is correct with regard to the relationship between the audit plan
and the audit strategy for an external audit engagement?
A. The audit plan should be developed before the audit strategy is established.
B. The audit plan and the audit strategy should be established and developed at the same time.
C. The overall audit strategy should be more detailed than the audit plan.
[Link] audit strategy should be established before the detailed audit plan is developed.

3. The preliminary audit strategy

A. is set before the auditor understands the client's reasons for the audit.
B. guides the development of the audit plan.
C. is determined after the engagement staffing is set.
D. is the detailed steps to be followed for the substantive audit tests.

4. An audit plan contains the nature, extent, and timing of procedures for gathering evidence.
Regarding audit procedures, which of the following best describes risk assessment procedures?
A. This category of procedures is used to obtain an understanding of the entity and its
environment, including its internal control, to assess the risks of material misstatement at the
financial statement and assertion levels.
B. This category of procedures is used to test the operating effectiveness of controls in preventing,
or detecting and correcting, material misstatements at the assertion level.
C. This category of procedures is used to detect material misstatements at the assertion level.
D. All of these statements describe risk assessment procedures.

5. PSA 315 requires:

A. Obtaining an understanding of the entity and its environment
B. Discussion among engagement team members about the risk of material misstatement in the
financial statements.
C. Identifying and assessing the risks of material misstatement
D. All of the above.

6. The auditor’s understanding of the entity and its environment consists an understanding of the
following aspects:
A. Industry, regulatory and other external factors, including the applicable financial reporting
framework
B. Nature of the entity, including the entity’s selection and application of accounting policies
C. Objectives and strategies and the related business risks that may result in a material
misstatement of the financial statements
D. All of the above.

7. An auditor obtains an understanding of the entity and its environment in order to

A. Make constructive suggestions concerning improvements to the client’s internal control.
B. Develop an attitude of professional skepticism concerning management’s financial statement
assertions.
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.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AT-07
Week No. 6: FS AUDIT PROCESS – AUDIT PLANNING

8. When gaining an understanding of the specific business operations of an audit client which of the
following matters would an auditor need to consider?
A. Accounting principles and industry specific practices relevant to the client’s business
B. Acquisitions or disposals of the client’s business activities
C. Leasing of property, plant or equipment for use in the client’s business
D. Products or services and markets of the client’s business
9. A person or firm possessing special skill, knowledge and experience in a particular field excluding
accounting and auditing.
A. Expert. C. Multiskilled personnel
B. Quality control reviewer D. Taxation specialist
10. In which of the following situations would an expert be least likely contracted by a CPA?
A. Application of accounting methods in computing inventory balances.
B. Determination of fair values using specialized statistical techniques.
C. Legal opinions concerning interpretations of engagements, statutes and regulations.
D. Valuations of certain types of assets like land and buildings.

11. In considering materiality for planning purposes, an auditor believes that misstatements aggregating
P10,000 would have a material effect on an entity’s profit and loss, but that misstatements would
have to aggregate P20,000 to materially affect the statement of financial position. Ordinarily, it
would be appropriate to design auditing procedures that would be expected to detect misstatements
that aggregate:
A. P30,000 B. P20,000 C. P15,000 D. P10,000
12. Audit standards require the auditor to consider materiality early in the audit. Which statement(s)
regarding preliminary materiality are true?
I. Preliminary materiality may change during the engagement.
II. Preliminary materiality is the maximum amount by which the auditor believes the financials could
be misstated and still not affect the decisions of reasonable users.
III. Materiality is based on the auditor’s experience and judgement.
A. 1, 2, and 3 C. 1 and 2
B. 1 and 3 D. 2 and 3
13. If an auditor establishes a relatively high level for materiality, then the auditor will
A. accumulate more evidence than if a lower level had been set.
B. accumulate less evidence than if a lower level had been set.
C. accumulate approximately the same evidence as would be the case were materiality lower.
D. accumulate an undetermined amount of evidence.

14. Qualitative factors can affect an auditor's assessment of materiality. Which of the following
statements is false?
I. Misstatements that are otherwise immaterial may be material if they affect earnings trends.
II. Misstatements that are otherwise minor may be material if there are possible consequences arising
from contractual obligations.
A. I only C. II only
B. I and II D. Neither I nor II
15. Which of the following is a reason that the auditors may change the preliminary judgment about
materiality?
A. The auditors decide that the preliminary judgment was too large.
B. The auditors decide that the preliminary judgment was too small.
C. Client circumstance may have changed due to qualitative events.
D. All of the above.
16. These are events or conditions that provide an opportunity, a motive or a means to commit fraud, or
indicate that fraud may already have occurred.
A. Audit risk. C. Risk of material misstatement.
B. Fraud risk factors. D. Fraud indications.
17. Which of the following is correct concerning requirements about auditor communications about
fraud?
A. Fraud that involves senior management should be reported directly to the audit committee
regardless of the amount involved.
B. Fraud with a material effect on the financial statements should be reported directly by the
auditor to the Securities and Exchange Commission.
C. Fraud with a material effect on the financial statements should ordinarily be disclosed by the
auditor through use of an “emphasis of a matter” paragraph added to the audit report.
D. The auditor has no responsibility to disclose fraud outside the entity under any circumstances.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AT-07
Week No. 6: FS AUDIT PROCESS – AUDIT PLANNING

18. Which of the following is an example of fraudulent financial reporting?

A. Company management changes inventory count tags and overstates ending inventory, while
understating cost of goods sold.
B. The treasurer diverts customer payments to his personal due, concealing his actions by debiting
an expense account, thus overstating expenses.
C. An employee steals inventory and the “shrinkage” is recorded in cost of goods sold.
D. An employee steals small tools from the company and neglects to return them; the cost is
reported as a miscellaneous operating expense.
19. With respect to errors and irregularities, the auditor should plan to
A. Search for errors that would have a material effect and for irregularities that would have either
material or immaterial effect on the financial statements.
B. Search for irregularities that would have a material effect and for errors that would have either
material or immaterial effect on the financial statements.
C. Search for errors or irregularities that would have a material effect on the financial statements.
D. Discover errors or irregularities that have either material or immaterial effect on the financial
statements.
20. The auditor should remain alert for evidence of events or conditions which may cast significant doubt
on the entity’s ability to continue as a going concern:
A. During planning and consideration of internal controls
B. During interim audit work
C. During year-end audit work
D. All of the above.
21. 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 short-
term loans.
D. Client has had increasing net losses for several years.
22. Analytical procedures are required:
A B C D
 As a risk assessment procedure performed during planning Yes Yes Yes Yes
 As a substantive test procedure during evidence-gathering Yes Yes No No
 As an overall review at audit completion No Yes No Yes
23. Analytical procedures used in planning 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 control structure.
24. The objective of performing analytical procedures in planning an audit engagement is to identify the
existence of:
A. Unusual transactions and events.
B. Illegal acts that went undetected because of internal control weaknesses.
C. Related party transactions.
D. Recorded transactions that were not properly authorized.
25. Which of the following statements is not a reason for utilizing analytical review procedures?
A. To assess the entity’s ability to continue as a going concern.
B. To identify areas with no unusual fluctuations so that fewer detailed tests may be performed on
those accounts.
C. To highlight changes from the prior year to the current year so that trends can be identified
which will influence audit planning.
D. To determine the magnitude of errors in the financial statements.
26. With respect to planning an audit, which of the following statements is always true?
A. It is acceptable to perform a portion of the audit of a continuing client at interim dates.
B. An engagement should not be accepted after the client’s year-end.
C. An inventory count must be observed at year-end.
D. Final staffing decisions must be made prior to completion of the planning stage.
27. The element of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the
A. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.
B. Procedures to be undertaken to discover litigation, claims, and assessments.
C. Pending legal matters to be included in the inquiry of the client’s attorney.
D. Timing of inventory observation procedures to be performed.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AT-07
Week No. 6: FS AUDIT PROCESS – AUDIT PLANNING

28. Which of the following is not typically included in initial audit planning?
A. Client acceptance/continuation decisions.
B. Determination of the purpose of the audit.
C. Obtain an understanding with the client.
D. Perform analytical procedures as substantive tests.

29. Which of the following is least likely considered by the auditor in establishing the overall audit
strategy and developing the audit plan?
A. Understanding of the accounting and internal control systems.
B. Risk and materiality.
C. The involvement of other auditors in the audit of major subsidiaries.
D. The terms of payment pertaining to other auditors and their respective clients.

30. Which of the following is not considered by the CPA when he/she makes an overall audit plan?
A. Identification of complex accounting areas including those involving accounting estimates.
B. The effect of information technology on the audit.
C. The content of the representation letters.
D. The nature and timing of reports and other communication with the entity that are expected
under the engagement.
31. This is a listing of all the things which the auditor will use to gather sufficient appropriate audit
evidence:
A. Audit procedures. C. Audit program.
B. Audit plan. D. Audit risk model.
32. In designing audit programs, an auditor should establish specific audit objectives that related
primarily to the
A. Timing of audit procedures C. Selected audit techniques.
B. Cost-benefit of gathering evidence D. Financial statement assertions.
33. The audit program should set out the:
A. Nature of planned procedures C. Extent of planned procedures
B. Timing of planned procedures D. All of these.

34. Cost-benefit considerations are part of audit planning. In relation to this, which of the following
audit procedures is usually the least costly to perform?
A. Tests of balances. C. Analytical procedures.
B. Substantive tests of transactions. D. Tests of controls.
35. The audit program usually cannot be finalized until the
A. Consideration of the entity’s internal control has been completed.
B. Engagement letter has been signed by the auditor and the client.
C. Reportable conditions have been communicated to the audit committee.
D. Search for unrecorded liabilities has been performed and documented.

36. The senior auditor responsible for coordinating the field work usually schedules a pre-audit
conference with the audit team primarily to
A. Give guidance to the staff regarding both technical and personnel aspects of the audit.
B. Discuss staff suggestions concerning the establishment and maintenance of time budgets.
C. Establish the need for using the work of specialists and internal auditors.
D. Provide an opportunity to document staff disagreements regarding technical issues.

37. Which of the following procedures is least likely performed in planning an FS 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 vendor’s invoices for comparison to receiving reports.
D. Reading the current year’s interim financial statements.
38. The audit plan generally is modified when
A. Results of tests of control differ from expectations.
B. An engagement letter has been signed by the auditor and the client.
C. A significant deficiency has been communicated to the audit committee of the board of
directors.
D. The search for unrecorded liabilities has been expected during the planning of the audit.

-end of AT-07-

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