Chap 1

1, In the conduct of audits of financial statements, it would be a serious breach of responsibility if the auditor did
not thoroughly understand accounting. However, many competent accountants do not have an understanding of
the auditing process. What causes this difference?
The function of accounting is not the same as the function of auditing, which causes this difference. Accounting is
responsible for recording, classifying, and summarizing economic events to provide relevant information to the
decision-makers. The rules of accounting are the criteria used by the auditor for evaluating the presentation of
economic events for financial statements the auditor is required to have professional competence and
knowledge of accounting standards as well as auditing standards. The accountant needs not to understand what
auditors do.

Chap 6
2, Reason why the auditor is responsible for reasonable, but not absolute, assurance (Chapter 6, page 151)
3, Distinguish between the general audit objectives and management assertions. Why are the general audit
objectives more useful to auditors?
Management assertions are implied or expressed representations by management about classes of transactions
and the related accounts and disclosures in the financial statements. Management assertions are directly related
to the financial reporting framework used by the company, as they are part of the criteria that management uses
to record and disclose accounting information in financial statements.

General audit objectives follow from and are closely related to management assertions. General audit objectives,
however, are intended to provide a framework to help the auditor accumulate sufficient appropriate audit
evidence. Audit objectives are more useful to auditors than assertions because they are more detailed and more
closely related to helping the auditor accumulate sufficient appropriate evidence.

Chap 7
4, Identify the two factors that determine the persuasiveness of evidence. How are these two factors related to
audit procedures, sample size, items to select, and timing?
The two determinants of the persuasiveness of evidence are appropriateness and sufficiency. Appropriateness of
evidence is a measure of the quality of evidence, meaning its relevance and reliability in meeting audit objectives
for classes of transactions, account balances, and related disclosures. The appropriateness criteria can be
improved only by selecting audit procedures that are more relevant or provide more reliable evidence. It cannot be
improved by selecting a larger sample size or different population items. It is also affected by the timing of when
those procedures are performed. Evidence is usually more reliable for balance sheet accounts when it is obtained
as close to the balance sheet date as possible.

The quantity of evidence obtained determines its sufficiency. The sufficiency factor is affected by the size of the
selected sample and the items to be selected. For a given audit procedure, the evidence obtained from a sample
of 100 is ordinarily more sufficient than from a sample of 50. For other objectives, sufficiency is determined
primarily by the number and quality of procedures performed to meet the audit objective.

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5, Compare the purposes of analytical procedures in the planning phase and in the completion phase of the audit.
Chapter 7, page 199
Chap 8
6, Explain why auditors need an understanding of the client’s industry. What information sources are commonly
used by auditors to learn about the client’s industry?
Auditors need an understanding of the client’s business and industry because the nature of the business and
industry affect business risk and the risk of material misstatements in the financial statements. Auditors use the
knowledge of these risks to assess the risk of material misstatement and to determine the appropriate extent of
further audit procedures. (more in Chapter 8, page 236)

The five major aspects of understanding the client's business and industry, along with potential sources of
information that auditors commonly use for each of the five areas, are as follows:
1. Industry and External Environment - Read industry trade publications, AICPA Industry Audit Guides, and
regulatory requirements.
2. Business Operations and Processes - Tour the plant and offices, identify related parties, and inquire about
manag.
3. Management and Governance - Read the corporate charter and bylaws, read the minutes of the board of
directors and stockholders, and inquire about management.
4. Client Objectives and Strategies - Inquire of management regarding their objectives for the reliability of financial
reporting, effectiveness and efficiency of operations, and compliance with laws and regulations; read contracts
and other legal documents, such as those for notes and bonds payable, stock options, and pension plans.
5. Measurement and Performance - Read financial statements, perform ratio analysis, and inquire management
about key performance indicators that management uses to measure progress toward its objectives.

7, What are the benefits derived from planning audits?

There are three main benefits derived from planning audits. Firstly, it enables the auditor to obtain sufficient
appropriate evidence for the circumstances. Secondly, it helps keep audit costs reasonable. Thirdly, it helps avoid
misunderstandings with the client.

8, Define what is meant by a related party. What are the auditor’s responsibilities for related parties and related
party transactions?
A related party is defined by auditing standards as an affiliated company, principal owner of the client company, or
any other party with which the client deals where one of the parties can influence the management or operating
policies of the other. Because related party transactions may not be at arm’s length, auditing standards require
that related parties and related party transactions be disclosed in the financial statements. Therefore, the auditor
must identify related parties and make a reasonable effort to determine that all material related party transactions
have been properly disclosed in the financial statements. Because instances of fraudulent financial reporting often
involve transactions with related parties, auditors should be alert for the presence of fraud risk.

2
9, Identify the three categories of client objectives. Indicate how each objective may affect the auditor’s
assessment of the risk of material misstatement and need for evidence accumulation.
The three categories of client objectives and each objective affects the auditor’s assessment of the risk of material
misstatement and need for evidence accumulation as follows:

1. Reliability of financial reporting: If management sees the reliability of financial reporting as an important
objective, and if the auditor can determine that the financial reporting system is accurate and reliable, then the
auditor can often reduce his or her assessment of risk of material misstatement and planned evidence
accumulation for material accounts. On the other hand, if management has little regard for the reliability of
management's financial reporting, the auditor must increase risk of material misstatement assessments and
gather more appropriate evidence during the audit.

2. Effectiveness and efficiency of operations: Auditors need knowledge of a client's effectiveness and
efficiency to assess client business risk and risk of material misstatement in the financial statements. For
example, if the client has a net income management problem that increases the auditor’s assessment of the
inherent risk to the accumulation of evidence for net income

3. Compliance with laws and regulations: The auditor needs to understand the laws and regulations that affect
an audit client, including significant contracts signed by the client. For example, inherent risk and planned
evidence to the pension would increase if provisions in a pension plan documentation were violated.

10, Explain why materiality is important but difficult to apply in practice

Materiality is important because if financial statements are materially misstated, users' decisions may be
affected, and thereby causing financial loss to them. There are some reasons
- there are often many different users of the financial statements, and auditors may not know who all the
users are or what decisions they may make based on the financial statements. Therefore, the auditor must
make an assessment of the likely users and the decisions they will make.
- materiality is a relative rather than an absolute concept. The professional auditing standards offer little
specific guidance regarding the application of materiality. As a result, the auditor must exercise
considerable professional judgment in the application of materiality.

11, What qualitative factors should she also consider in deciding whether misstatements may be material?
- amounts involving fraud are usually considered more important than unintentional errors of equal dollar amounts.
For example, most users consider an intentional misstatement of inventory more important than clerical errors in
inventory of the same dollar amount.
- minor misstatements may be material if there are possible consequences arising from contractual obligations.
- misstatements that are otherwise immaterial may be material if they affect a trend in earnings. For instance, if
reported income has increased three percent annually for the past five years but income for the current year has
declined one percent, that change may be material.

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12, Assume materiality for the financial statements as a whole is $100,000 and performance materiality for
accounts receivable is set at $40k. If the auditor finds one receivable that is overstated by $55k. what should the
auditor do?
If performance materiality for accounts receivable is $40,000 and the auditor finds a $55,000 overstatement of a
receivable balance, the auditor would document the misstatement and evaluate the results of the remaining audit
procedures in accounts receivable. The $55,000 overstatement is an example of a known misstatement. The
auditor could request the client make an adjustment to correct the overstatement or make a note of the
overstatement for follow-up at a later point in the audit. If accounts receivable testing was performed using
sampling techniques, the auditor would also project total known misstatements to the population and may perform
additional testing depending on the outcome.

Chap 9:
13, Which additional individuals should you consider making inquiries of as part of your risk assessment
procedures?
In addition to inquiring about individuals among management, auditors can inquire of those charged with
governance, such as the board of directors or audit committee. They may provide information about the overall
competitive environment and strategy of the business that may provide important insights about overall client
business risks. Or auditors can inquire of individuals others within the entity who are involved in different roles and
who are at different levels within the client’s operations. For instance, individuals who help manage legal affairs or
regulatory compliance for the entity may know relevant to the auditor’s assessment of the risk of material
misstatements, especially the impact of noncompliance on financial reporting.

14, Why is it important to distinguish the auditor’s assessment of the risk of material misstatement due to fraud
from the assessment of the risk of material misstatement due to error?
Because the risk of not detecting a material misstatement due to fraud is higher than the risk of not detecting a
misstatement due to error, it is essential to distinguish the auditor’s assessment of the risk of material
misstatement due to fraud from the assessment of the risk of material misstatement due to error. Fraud often
involves complex and sophisticated schemes designed by perpetrators to conceal it. Individuals engaged in
conducting fraud often intentionally misrepresent information to the auditor, and they may try to conceal the
transaction through collusion with others. Therefore, identifying material misstatements due to fraud is difficult. In
contrast, error is an unintentional misstatement, and it is easier to detect. Fraud là quản lý cấp cao còn error là
cấp thấp làm

15, What types of inquiries should the aud make when considering the risk of material misstatement due to fraud?
When considering the risk of material misstatement due to fraud, the auditor should inquire of management about
their assessment of the risk that the financial statements may be materially misstated due to fraud. As part of
those inquiries, the auditor should ask management to describe the frequency of management’s assessments and
the extent of their consideration of risks due to fraud, including discussion about management’s processes that
are designed to identify, respond to, and monitor the risks of fraud in the organization. Making inquiries of
management and others within the entity, the auditor may obtain their knowledge of any actual, suspected, or
alleged fraud affecting the client and whether management has communicated any information about fraud risks
to those charged with governance.
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16, Explain the causes of an increased or decreased planned detection risk.
Because the audit risk model stated that planned detection risk equals acceptable audit risk divided by the
multiplication between inherent risk and control risk, an increase in planned detection risk may be caused by an
increase in acceptable audit risk or a decrease in either control risk or inherent risk. A decrease in planned
detection risk is caused by the opposite: a decrease in acceptable audit risk or an increase in control risk or
inherent risk.

17, Explain why there is an inverse relationship between planned detection risk and the amount of evidence an
auditor collects for a specific audit objective.
Planned detection risk is the risk that audit evidence for a segment will fail to detect misstatements that could be
material, should such misstatements exist. To reduce the risk, the auditor would increase the amount of evidence
they collect for a specific audit objective. Therefore, planned detection risk has an inverse relationship with
evidence. For instance, if the auditor wanted a low level of risk that audit procedures designed to test the
existence of inventory fail to detect a material misstatement, they would increase the amount of inventory tested
and the number of audit procedures performed.

18, Explain the circumstances when the auditor should revise the components of the audit risk model and the
effect of the revisions on planned detection risk and planned evidence.
The auditor should revise the components of the audit risk model when the evidence accumulated during the audit
indicates that the auditor's original assessments of inherent risk or control risk are too low or too high or the
original assessment of acceptable audit risk is too low or too high. The auditor should exercise care in determining
the additional amount of evidence that will be required. This should be done without the use of the audit risk
model. If the audit risk model is used to determine a revised planned detection risk, there is a danger of not
increasing the evidence sufficiently.

19, Explain how AR and materiality are related and why they need to be considered together in planning an audit.
Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are
materially misstated. AR equals inherent risk times control risk times detection risk. Materiality and detection risk
move in the same direction. An auditor can not assess the risk of material misstatement without first deciding the
size of misstatements that will be considered material. Materiality and audit risk are considered together in
planning the nature and extent of risk assessment procedures to be performed, identifying and assessing the risk
of material misstatement, determining the nature, timing, and extent of audit procedures, and evaluating audit
findings.

Chap 11
20, What is meant by the control environment? What is the relationship between the control environment and the
other four components of internal control?
The control environment consists of the actions, policies, and procedures that reflect the overall attitudes of top
management, directors, and owners of an entity about internal control and its importance to the entity. The control
environment serves as the umbrella for the other four components of internal control. The other four components,
regardless of their quality, are unlikely to result in effective internal control without an effective control

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environment. All five components, however, are required for a well-designed and effectively implemented internal
control system.

21, The separation of operational responsibility from record keeping is meant to prevent different types of
misstatements than the separation of the custody of assets from accounting. Explain the difference in the
purposes of these two types of separation of duties.
The separation of operational and record-keeping responsibilities is intended to limit the risk of operational
personnel biasing the results of their performance by improperly recording information. The separation of the
custody of assets from accounting for these assets is intended to prevent misappropriation of assets. Permission
for one person to perform both functions leads to an increase in the likelihood of that person's disposal of the
asset for personal benefit and adjustment of the records to cover up the theft.

22, Describe why auditors generally evaluate entity-level controls before evaluating transaction-level controls.
Because entity-level controls will have pervasive effects on the entity's transaction-level control system. Examples
include the entity's risk assessment process and the role of internal control in monitoring controls. When entity-
level controls are assessed effectively, the risk of misstatements is reduced, allowing the auditor to conduct fewer
tests and obtain less evidence of control transactions, and vice versa.

Chap 12
23, If the auditor assesses control risk as high for a transaction-related audit objective, what does that imply for
detection risk and the level of substantive testing?
If the auditor determines that the control risk for a transaction-related audit objective is high, the auditor will need
to lower the detection risk to maintain the desired level of audit risk. A lower level of detection risk in turn means
more extensive substantive testing.

Chap 13
24, What is the purpose of risk assessment procedures and how do they differ from the 4 types of audit tests?
Auditors perform risk assessment procedures to assess the risk of material misstatement in the financial
statements. Risk assessment procedures include procedures performed to obtain an understanding of the entity
and its environment, including internal controls. Auditors use the results of the risk assessment procedures to
design and perform further audit procedures, which are tests of controls, substantive tests of transactions,
substantive analytical procedures, and tests of details of balances. The combination of these four types of further
audit procedures provides the auditor with sufficient appropriate evidence that forms the basis for the auditor’s
opinion.

25, What is the purpose of tests of controls? Identify specific accounts on the financial statements that are
affected by performing tests of controls for the acquisition and payment cycle.
Auditors perform tests of controls to test the operating effectiveness of control policies and procedures in support
a reduced assessment of control risk. Tests of controls provide the primary basis for a public company auditor’s
report on internal controls over financial reporting. Specific accounts affected by performing tests of controls for
the acquisition and payment cycle include the following: cash, accounts payable, purchases, purchase returns and
allowances, purchase discounts, manufacturing expenses, selling expenses, prepaid insurance, and numerous
administrative expenses.

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26, Distinguish between a test of control and a substantive test of transactions. Give two examples of each.
Tests of controls are audit procedures to test the operating effectiveness of control policies and procedures in
support of a reduced assessed control risk. Examples are:

1. Examine a sample of duplicate sales invoices to determine that each one is supported by an authorized
shipping document and approved customer order (inspection).

2. Observe whether personnel responsible for handling cash have no accounting responsibilities and inquire as to
their duties (observation and inquiry).

Substantive tests of transactions are audit procedures testing for monetary misstatements to determine whether
the six transaction-related audit objectives have been satisfied for each class of transactions. Examples are:

1. Recalculation of amounts (quantity times unit selling price) on selected sales invoices and tracing of amounts to
the sales journal.

2. Tracing of selected customer cash receipts to the AR master file, agreeing customer names and amounts.

27, Distinguish between substantive tests of transactions and tests of details of balances. Give one example of
each for the acquisition and payment cycle.
Substantive tests of transactions are audit procedures testing for monetary misstatements to determine whether
the six transaction-related audit objectives have been satisfied for each class of transactions. This is
accomplished by determining whether individual transactions are correctly recorded and summarized in the
journals, master files,

and general ledger. An example of the acquisition and payment cycle is the examination of vendor invoices in
support of amounts recorded in the acquisitions journal for purchases of a fixed asset.

Tests of details of balances verify the ending balance in an individual account on the financial statements.
Physical examination a sample of the client's fixed assets is an example of a test of details of balances for the
acquisition and payment cycle.

28, For each of the eight types of evidence discussed in Chapter 7, identify whether it is applicable for risk
assessment procedures, tests of controls, substantive tests of transactions, substantive analytical procedures,
and tests of details of balances
The following indicates which types of evidence are applicable for the five types of tests:
- Physical examination: Tests of details of balances
- Confirmation: Tests of details of balances
- Inspection: All except substantive analytical procedures
- Observation: Risk assessment procedures and tests of controls
- Inquiries of the client: All five types
- Reperformance: Tests of controls, substantive tests of transactions, and tests of details of balances
- Analytical procedures: Substantive analytical procedures
- Recalculation: Substantive tests of transactions and tests of details of balances

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 Chap 24:
29, Distinguish between a contingent liability and an actual liability and give three examples of each.

30, Explain why the analysis of legal expense is an essential part of every audit
The analysis of legal expenses is an essential part of every audit engagement because it may indicate contingent
liabilities which may become actual liabilities in the future and require disclosure in the current financial
statements. Since any single contingency could be material, it is important to verify all legal transactions, even if
the amounts are small. After the legal expense analysis is completed, the attorneys to whom payment was made
should be considered for letters of confirmation for contingencies.

31, What major considerations should the auditor take into account in determining how extensive the review of
subsequent events should be?
1. The effectiveness of the company's internal controls.
2. The company's financial strength and stability of earnings.
3. Changes in key personnel.
4. The length of time between the balance sheet date and the date of the auditor’s report.
5. The number and significance of the adjustments made by the auditor.
PCAOB also requests auditors of public companies to inquire about changes in internal control over financial
reporting occurring after the end of the fiscal period that might significantly affect inter contr over financial
reporting.
Chap 3:
32, Explain why auditors’ reports are important to users of financial statements and why it is desirable to have
standard wording.
Auditor's reports are important to users of financial statements because they inform users of the auditor's opinion
as to whether or not the statements are fairly stated in all material respects or whether no conclusion can be made
concerning the fairness of their presentation. Any deviation from the wording of the standard unqualified report
and the reasons and implications of such deviations are especially looked for by users. It is desirable to have
standard wording because it improves communications for the benefit of users of the auditor’s report. When there
are departures from the standard wording, users are more likely to recognize and consider situations requiring a
modification or qualification to the auditor’s report or opinion.

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33, Distinguish between an unmodified opinion audit report that contains an emphasis-of-matter explanatory
paragraph and a qualified report.
An unmodified opinion audit report with an emphasis-of-matter paragraph is the same as a standard unqualified
report except that the auditor believes it is important to draw the reader’s attention to certain matters or the auditor
is required to provide additional information.

A qualified opinion report can result from a limitation on the scope of the audit or failure to follow generally
accepted accounting principles, but only when the auditor concludes that the overall financial statements are fairly
stated, except for a specific aspect of them.

34, Distinguish between a qualified opinion, an adverse opinion, and a disclaimer of opinion, and explain the
circumstances under which each is appropriate.
A qualified opinion can result from a limitation on the scope of the audit or failure to follow generally accepted
accounting principles, but only when the auditor concludes that the overall financial statements are fairly stated,
except for a specific aspect of them. The term “except for” must be used in the opinion paragraph when an auditor
issues a qualified report, and it is unacceptable to use the phrase “except for” with any other type of audit opinion.
This type of opinion can not be used if the auditors believe the exceptions being reported upon are extremely
material, in which case a disclaimer or adverse opinion would be used.

An adverse opinion is used only when the auditor believes that the overall financial statements are so materially
misstated or misleading that they do not present fairly the financial position or results of operations and cash flows
in conformity with GAAP. The adverse opinion report can arise only when the KT has knowledge, after an
adequate investigation, of the absence of conformity. This is uncommon, and thus the adverse opinion is rarely
used.

A disclaimer of opinion states that the auditor has been unable to satisfy him or herself as to whether or not the
overall financial statements are fairly presented because of a severe limitation on the scope of the audit, or a
nonindependent relationship under the AICPA Code of Professional Conduct between the auditor and the client.
The auditor also has the option to issue a disclaimer of opinion for a going concern problem.

35, Define materiality as it is used in audit reporting. What conditions will affect the auditor’s determination of
materiality?
The definition of materiality as it is used in audit reporting is: “A misstatement in the financial statements can be
considered material if knowledge of the misstatement would affect a decision of a reasonable user of the
statements.” Conditions that affect the auditor's determination of materiality include:

− Potential users of the financial statements

− Dollar amounts of the following items: net income before taxes, total assets, CA, CL, and owners' equity
− Nature of the potential misstatements - certain misstatements, such as fraud, are likely to be more important to
users of the financial statements than other misstatements.

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36, How does the auditor’s opinion differ between scope limitations caused by client restrictions and limitations
resulting from conditions beyond the client’s control? Under which of these two will the auditor be most likely to
issue a disclaimer of opinion? Explain.
The auditor's opinion could be qualified by scope limitations imposed by the client or limitations imposed by
conditions beyond the client's control. The key distinction between the two methods is that the former happens, for
example, when the customer refuses to allow the auditor to physically inspect inventories or validate material
receivables. The latter can happen if the engagement is not agreed upon until after the client's year-end, when it
may not be possible to physically observe inventories or confirm receivables.

A disclaimer of opinion is issued if the scope limitation is so material that the auditor cannot determine if the
overall financial statements are fairly presented. If the scope limitation is caused by the client's restriction, the
auditor should be concerned about the possibility that management is trying to prevent the discovery of misstated
information. For this reason, a disclaimer of opinion is more likely for client restrictions than for conditions beyond
the client's control.

37, When an auditor discovers more than one condition that requires departure from or modification of the
standard unmodified opinion audit report, what should the auditor’s report include?
the auditor should modify his or her opinion for each condition unless one has the effect of neutralizing the others.
For instance, if there is a scope limitation and a situation in which the auditor is not independent, the scope
limitation should not be mentioned because the lack of independence overshadows the scope limitation. The
example when more than one modification should be included in the report: there is a scope limitation and there is
substantial doubt about the company’s ability to continue as a going concern.

II, Nhận định Đúng – Sai, giải thích (4 câu – 0,5 điểm/câu)
1. Accounts receivable confirmations must be controlled by the client from the time they are prepared until the
time they are returned to the auditor.False The auditor must keep control over the “confirmation requests” “and
responses” when conducting confirmation procedures to minimize the risk that these information could be
intercepted or altered, leading to the results being biased.

2. If a sale was for a valid shipment, but the amount of the sales invoice was calculated incorrectly, the accuracy
objective was violated.True. Because the accuracy objective is concerned with the accuracy of information for
accounting transactions. The wrong amount on the sales invoice leads to a violation of this objective.

3. Because auditors are responsible for having appropriate competence and capabilities to perform an audit,
auditors are not normally permitted to consult with outside specialists during an audit engagement.False. Because
the auditor is allowed to consult with independent specialists if the audit requires specific expertise. For instance,
when measuring the replacement cost of diamonds, the auditor can select a diamond specialist.

4. Performance materiality impacts inherent risk and control risk.False. Because both IR CR exist independently
of the audit of the financial statement, and the auditor can only assess them. If the auditor concludes that the
degree of “IR” and “CR” are high, they must decrease detection risk to low and set the performance materiality
level to low.

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5. For a private company client, auditors are required to test any internal controls they believe have not been
operating effectively during the period under audit.False. For a private company client, the auditor will assess
control risk at maximum and not perform TOC when internal controls are ineffective or nonexistent for any audit
objectives.

6. Acceptable audit risk and the amount of substantive evidence required are inversely related.

True. Because if the acceptable audit risk is decided to be reduced, this means that there is a decrease in the
“willingness of the auditor” to “permit material misstatements” to exist after finishing the audit. Therefore, the
auditor must enhance the amount of substantive evidence gathered, and vice versa.

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