MULTIPLE CHOICE Questions 5-8

Chapter 5

1.This involves developing an Overall strategy for the expected conduct and scope of examination, the
nature, extent and timing of which vary with the size and complexity, and experience with and
knowledgeof the entity. a. Audit planning. C. Audit program d. Audit working papers. Audit procedures.

A Answer:

AnswerB is incorrect because audit procedures refer to acts to be performed by the auditor to achieve
audit objectives. Answer C is incorrectbecause an audit program refersto the detailed instructions for
the entire collection of evidence for an audit area or an entire audit. It sets out the nature, timing, and
extent of planned audit prOcedures required to implement the overall audit plan. Answer D is incorrect
because working papers document the audit procedures performed, the audit evidence gathered, and
the Conclusions reached by the auditor

2.The preliminary judgment about materiality is the by which the auditor believes the statements could
be misstated and still not affect the decisions of reasonable users. amount 2. C. Mean average. d.
Median average a. Maximum. b. Minimum

Answer: A

3. Which of the following statements regarding inherent risk is correct? The inherent risk assigned in the
audit risk model is unaffected by the auditor's experience with the client organization Most auditors set
a low inherent risk in the first year of an audit and increase it if experience shows that it was incorrect.
C. Most auditors set a high inherent risk in the first year of an audit and decrease it in subsequent years
as they gain experience, even when there is inherent risk, dThe inherent risk assigned in the audit risk
model is dependent upon the strengths in the client'ssystem of internal control

Answer: C

4. When discussing control risk (CR) and the audit risk model, which of the following statements is
incorrect? 4 a. CR is a measure of the auditor's assessment of the likelihood that misstatements will not
be prevented or detected by the entity's system of internal control. b. If the auditor concludes that
internal control is completely ineffective to prevent or detect errors, he would assign a low value (e.g.,
0%) to CR. The relationshipbetween control risk and detection risk is C. inverse. Control risk cannot be
zero. d. Answer: B

5.An auditor should design the written audit program so that a. All material transaction will be selected
for substantive testing.. b.The audit procedures selected will achieve specific audit objectives. C.
Substantive procedures prior to the balance sheet datewillbe minimized.d.Each account balance will be
tested under either tests of controls ortests oftransactions.

Answer: B
6. Which of the following factors would ordinarily be considered in planning an audit engagement's
personnel requirements? Opportunities for on-the-job training. Continuing and periodic rotation of
personnel. Both A and B. Neither A nor B. a. b C. d.

Answer: C

7. Which of the following is not a component of audit planning? a. Observing the client's physical
inventory-taking and making test counts of selected items. b. Obtaining an understanding of the entity.
C. Developing audit programs d. Making arrangements with the client concerning the timing of audit
work and use of the client's staff in competing certain parts of the audit.

A Answer.

8. Consider the following statements about materiality Auditors are strongly encouraged to decide on
the combined amount of misstatements in the financial statements that they Would consider material
early in the audit. After the preliminary judgment about materiality has been established, auditors may
adjust it either downward or upward. C. BothI and II are correct. d. a. OnlyI is correct. b. Only Il is
correct. Both I and ll are incorrect.

Answer: B

9 Risk in auditing means that the auditor accepts some level t uncertainty in performing the audit
function.. An effective auditor will a. Set the audit risk level between 10% and 15%. b. Perform the audit
procedures first and quantitatively set the audit risk level before forming an opinion. C. Recognize that
risks exist and deal with them in an appropriate manner. d. Take any means available to reduce the risk
to the lowest possible level.

Answer: C

10.Which of the following is most likely to require special planning considerations related to asset
valuation? A. Assets costing less than P200 are expensed even when the expected life exceeds one year
Inventory is comprised on diamond rings. C. Accelerated depreciation methods are used for depreciating
the costs of factory equipment. D. The client has recently purchased an expensive copying machine.

Answer: B

11. What is the likely reason why the senior auditor responsible for Coordinating the field work usually
schedules a pre-audit conference with the audit team? a. To give guidance to the staff regarding both
technical and personnel aspects of the audit. b. To discuss staff suggestions concerning the
establishment and maintenance of time budgets. To establish the need for using the work of experts
and internal auditors. d. To provide an opportunity to document staff disagreements regarding
technical issues. Answer: A

12. A preliminary or entrance conference withtheauditee is a useful step in avoiding misunderstandings.

Which of the following items is usually not covered in a preliminary conference? a. a. Audit programsto
be followed by the auditor. b. Special problems known that are relevant to the audit. d. Condition of
accounting records and other data sources which and C. C. Extent of which the auditor will need the
assistance and COoperation from the client entity's personnel. may affect the scope of the audit and
difficulty of completion.

Answer:A

13. What is the primary means of dealing with risk in planning decisions related to audit related to
evidence? Selection of more effective tests of details of balances. a.Allocating materiality judgment to
segments. C. Application of the audit risk model. d. Establishing a lower preliminaryjudgment about
materiality.

Answer:C

14. The audit program can only be finalized Upon the completion of the consideration of the entity's
system of internal control. b. After the engagement letter has been signed by the auditor and the client.
c. When significant deficiencies in internal control have already been communicated to the board of
directors. d. Whensearch forunrecorded liabilities hasbeenperformed anddocumented.

Answer: A

15. Certain types of misstatements are likely to be more important than other types to users, even if the
pes0 amounts are the same. Which of the following demonstrates this? a. Amounts involving fraud are
considered more important than errors of equal amount. b Misstatements that are otherwise
immaterial may be material if they affect a trend in earnings. C. Both A and B. d. Neither A nor B.

Answer: C

16. The in-charge auditor most likely would have a supervisory responsibility to explain to the staff
assistants a. The immaterial irregularities are not to be reported to the audit committee. b. How the
results of various auditing procedures performed by the assistants should be evaluated. C. Whatbenefits
maybe attained by theassistants' adherence to C. established timebudgets. d. Why certain documents
are being transferred from the current file to the permanent file.

Answer: B

17. The audit plan generally is modified when

a. An audit engagement letter has been signed by the auditor and the client.b.The search for unrecorded
liabilities has been performed and obtained results as had been expected during the planning of the
audit. Results of tests of controls differ from expectationsC. d. A significantdeficiencyhas been
communicated to the board of directors.
Answer:C

18. Consider the following statements Planning an audit involves establishing the overall audit strategy
for the engagement and developing the auditor's report, in order to reduce audit risk to an acceptably
low level. Il. Planning an audit is essential because it allows the engagement to be performed in an
effective manner. Il. Planning involves the engagement partner and other key members of the
engagement team to benefitfrom their experience and insightand to enhancethe effectivenessand
efficiency of the planning process. IV. Planningis a continual and iterative processthat often begins
shortlyafter (or in connection with) the completion of the previous audit and continues until the
completion of the engagement. Which statements are correct? a. 1, Il and lll only b. I1, II1 and IV only. C.
II and IV only. d. 1, l and IV only.

Answer:B

19. Judgments abOut materiality are made in the light of surrounding circumstances, and are affected by
a. Both the auditor's perception of the financial information needs cf users of the financial statements
and the size or nature of a misstatement b. The company's control environment. The size or nature of a
misstatement. C. d. The auditor's perception of the financial information needs of users of the financial
statements.

Answer: A

20. Which of the following is one of the procedures in the planning phase of an audit? a. Determine
materiality. b. Determine the need to send an audit engagement letter. C. Prepare client proposal. d.
Select staff to perform the audit.

Answer: A

21. After acceptance of the audit engagement, a successor auditor should request the new client to
authorize the predecessor auditor to allow a review of the predecessor's Engagement letter. I. Working
papers. C. Both I and lIl. d. Neither I nor ll. a. Ionly. b. Il only.

Answer: B