Excel Professional Services, Inc.

Management Firm of Professional Review and Training Center (PRTC)

(LUZON) Manila 87339344 * Calamba City, Laguna * Dasmariñas City, Cavite * Lipa City,

Batangas (0917) 8852769 * (VISAYAS) Bacolod City (034) 4346214 * Cebu City (032)

2537900 loc. 218 (MINDANAO) Cagayan De Oro (0917) 7081465 * Davao City (082) 2250049

AUDITING THEORY
AT.300 6 – Planning an Audit R.C.P. SOLIMAN/ K.J. UY
of Financial Statements MAY 2021

Reference:
a. PSA 300 (Redrafted), Planning an Audit of Financial Statements

DISCUSSION QUESTIONS
Overview of Audit Planning
1. This involves establishing the overall audit strategy for
the engagement and developing an audit plan, in
order to reduce audit risk to an acceptably low level.
a. Audit procedures c. Audit program
b. Audit planning d. Audit working papers
2. The audit plan sets the scope, timing and direction of
the audit, and guides the development of the more
detailed audit strategy.
employees.
Major Audit Planning Activities
6. The results of preliminary engagement activities assist
an auditor in identifying circumstances that may
adversely affect audit and enable the auditor to a.
Maintain independence.
b. Identify issues with management integrity.
c. Ensure no misunderstanding as to engagement
terms.
d. All of the above.

The audit strategy is more detailed than the audit plan 7. Which of the following is not a component of audit
and includes the nature, timing and extent of audit planning?
procedures to be performed by engagement team a. Making arrangements with the client concerning
members in order to obtain sufficient appropriate audit the timing of audit field work and use of the
evidence to reduce audit risk to an acceptably low client's staff in completing certain phases of the
level. examination.
a. True, True c. False, False b. Obtaining an understanding of the business.
b. True, False d. False, True c. Developing audit programs and strategy.
d. Observing the client's annual physical inventory
3. The audit plan should taking and making test counts of selected items.
a. b. c. d.
Precede action Yes No Yes No 8. In planning an examination, the auditor would
Be flexible Yes No Yes Yes consider all of the following matters, except a.
Be cost beneficial Yes Yes No Yes Anticipated reliance on internal controls.
b. Preliminary judgment about materiality levels for
Benefits of Audit Planning audit purposes.
c. Financial statement items likely to require
4. Adequate audit planning helps ensure that: adjustment.
a. b. c. d. d. The kind of opinion (unqualified, qualified,
Appropriate attention is disclaimer, or adverse), likely to be given.
devoted to important
areas of the audit. Yes Yes Yes Yes 9. Which of the following procedures is not performed as
Potential problems can be promptly identified and a part of planning an audit engagement?
resolved. Yes Yes No No a. Reviewing the working papers of the prior year.
Work is performed in an effective and efficient b. Performing analytical procedures.
manner. Yes Yes No Yes c. Confirmation of all major accounts.
An unqualified opinion is d. Designing an audit program.
assured to be expressed. Yes No No Yes
10. Which of the following procedures would an auditor
5. Which of the following is not one of the three main most likely include in the initial planning of a financial
reasons why the auditor should properly plan statement audit?
engagements? a. Obtaining a written representation letter from the
a. To enable the auditor to obtain sufficient client's management.
appropriate evidence. b. Examining documents to detect illegal acts having
b. To avoid misunderstandings with the client. a material effect on the financial statements.
c. To help keep audit costs reasonable. c. Considering whether the client's accounting
d. To enable proper on-the-job training estimates are reasonable in the circumstances.
of

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EXCEL PROFESSIONAL SERVICES, INC.

d. Determining the extent of involvement of the c. The specific procedures to be performed

experts and client's internal auditors. to gather audit evidence.
d. The involvement of other auditors in the
11. An initial audit requires more audit time to complete audit of
than a recurring audit. One of the reasons for this is components of the group.
that
a. new auditors are usually assigned to an initial 17. Which of the following is not considered by the auditor
audit. when preparing an overall audit plan (strategy)?
b. predecessor auditors need to be consumed. a. The effect of information technology on
c. the client's business, industry and internal control the audit.
are unfamiliar to the auditor and need to be b. The nature and timing of reports and
carefully studied. other communication with the entity that
d. a larger proportion of customer accounts are expected under the engagement.
receivable need to be confirmed on an initial audit. c. The identification of complex accounting
areas including those involving
12. The nature and extent of planning will vary according accounting estimates.
the following, except d. The content of the management
a. Size of the auditing firm representation letter.
b. Nature and complexity of the entity
c. Auditor’s experience with the entity and knowledge Initial Audit Engagement—Additional Considerations
of the business
d. Changes in circumstances that occur during the 18. An initial audit requires more audit time to complete
audit engagement than a recurring audit. One of the reasons for this is
that
Establishing Overall Audit Strategy and Detailed a. new auditors are usually assigned to an
Audit Plan initial audit.
b. predecessor auditors need to be
13. Client strategy templates provide a means for an consumed.
auditor to c. the client's business, industry and
a. Acquire, evaluate, and document internal control are unfamiliar to the
evidence. auditor and need to be carefully studied.
b. Focus on transactions likely to affect d. a larger proportion of customer accounts
audit risk. receivable need to be confirmed on an
c. Compile the strategies and initial audit.
characteristics of an entity.
d. Distinguish between engagement risk 19. Which of the following is not one of the auditor’s
and audit risk. additional considerations for initial audits?
a. Performance of client acceptance and
14. In developing an overall audit strategy, an auditor continuance procedures.
should consider: b. Communication with prior auditor.
a. Whether the allowance for sampling risk c. Planned audit procedures regarding
exceeds the achieved upper precision opening balances.
limit. d. Any issues (including accounting and
b. Findings from substantive tests auditing)
performed at interim dates. discussed with management.
c. Whether the inquiry of the client's
attorney identifies any litigation, claims, Audit Engagement Team
or assessments not disclosed in the
financial statements. 20. Indicate whether the following functions would be
d. Preliminary evaluations of materiality, performed by:
audit risk, and internal control. P – Partner S – Senior
M – Manager AS – Audit Assistant
15. The following are the matters to be considered by the I. Supervises two or more concurrent audit
auditor in establishing the overall audit strategy, engagements
except II. Performs detailed audit procedures
a. Defining the scope of the examination III. Overall responsibility for audit IV. Signs audit
b. Assess risk and materiality report
c. Computation of audit fees I. II. III. IV.
d. Ascertaining the reporting objectives of a. P AS S M
the b. M A M P
engagement c. M AS P P
d. P AS S M
16. In developing the overall audit strategy for a new
client, factor not be considered is: 21. The senior auditor responsible for coordinating the
a. The terms of the engagement and any field work usually schedules a pre-audit conference
statutory responsibilities. with the audit team primarily to
b. The client’s business, including the a. Provide an opportunity to document staff
structure of the organization and disagreements regarding technical
accounting system used. issues.

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EXCEL PROFESSIONAL SERVICES, INC.

b. Establish the need for using the work of 27. The principal reason for developing a written audit
specialist and internal auditors. program is to help ensure that the
c. Discuss staff suggestions concerning the a. audit work is properly supervised
establishment and maintenance of time b. audit work is properly planned and
budgets. documented
d. Give guidance to the staff regarding c. audit report contains only significant
both technical findings
and personnel aspects of the audit. d. work of different auditors is properly
coordinated
22. The in-charge auditor most likely would have a
supervisory responsibility to explain to the staff 28. One of the primary roles of an audit program is to:
assistants a. Serve as a tool for planning, directing,
a. That immaterial fraud is not to be and controlling audit work.
reported to the client's audit committee. b. Document an auditor's understanding of
b. How the results of various auditing the internal control.
procedures performed by the assistants c. Provide for a standardized approach to
should be evaluated. the audit engagement.
c. What benefits may be attained by the d. Delineate the audit risk accepted by the
assistants' adherence to established auditor.
time budgets.
d. Why certain documents are being 29. Audit program is basically a listing of all the things the
transferred from the current file to the auditor will do to gather sufficient, competent
permanent file. evidence. Which item would not be contained in an
audit program?
23. Who in a public accounting firm is most likely to a. Staff assigned to the audit.
schedule the audit staff to perform the audit b. List of specific procedures (tasks) to be
engagement? performed and the objectives to be met.
a. Audit partner c. Documentation of system being
b. Audit manager reviewed.
c. Senior auditor or in-charge accountant d. Estimated time required in performing
d. Junior auditor each task.

Developing the Detailed Audit Plan
24. The audit plan includes:
a. A description of the nature, timing and
extent of planned risk assessment
procedures sufficient to assess the risk
of material misstatement.
b. A description of the nature, timing and
extent of planned further audit
procedures at the assertion level for
each material class of transactions,
account balances and disclosures.
c. Other planned audit procedures that are
required to be carried out so that the
engagement complies with our audit
approach.
d. All of the above.
25. The audit program usually cannot be finalized until the
a. consideration of the entity’s internal
control structure 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 of
the board of directors.
d. search for unrecorded liabilities has been
performed and documented.
26. The procedures specifically outlined in an audit
program are primarily designed to
a. Protect the auditor in the event of
litigation.
b. Detect errors or irregularities.
c. Test internal control structure.
d. Gather evidence.
30. In designing written audit programs, an auditor should
establish specific audit objectives that relate primarily
to the:
a. Timing of audit procedures.
b. Cost–benefit of gathering evidence.
c. Selected audit techniques.
d. Financial statement assertions.
31. An auditor should design the written audit program so
that
a. all material transactions will be selected
for substantive testing.
b. substantive tests prior to the balance
sheet date will be minimized.
c. the audit procedures selected will
achieve specific objectives.
d. each account balance will be tested
under either tests of controls or tests of
transactions.
32. Assertions are representations by management,
explicit or otherwise, that are embodied in the
financial statements. Management's assertions in the
financial statements are of relevance to the audit
process because:
a. they are the procedures that will be
performed by the audit team.
b. they are direct evidence that
management has prepared financial
statements in accordance with generally
accepted audit standards.
c. they relate more to the audit while the
financial statements belong to the
auditor.
d. they are utilized by auditors in
developing proper
tests and procedures.

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EXCEL PROFESSIONAL SERVICES, INC.

33. Which of the following concepts is most useful in a. Timing of inventory observation procedures.
assessing the scope of an auditor's program relating to b. Evidence to be gathered to provide a sufficient and
various accounts? appropriate basis for the auditor’s opinion.
Documentation in the country. After her training, Erika was assigned in an audit engagement which has just
commenced
39. The overall audit strategy should be updated and few weeks before she was admitted to the firm. Her changed as
necessary during the course of the audit. audit senior handed her a document that summarizes the decisions
taken by the audit team during the initial
The audit plans should not be updated and changed phase of the audit. That document was most likely during the
course of the audit, as these are detailed a(an) plans and revising them would be impractical in most a. Audit
Program
cases. b. Audit Planning Memorandum
a. True, True c. False, False c. Internal Control Questionnaire
b. False, True d. True, False d. Summary Review Memorandum

40. Erika recently passed the CPA licensure examination

and
was now a new hire in one of the top auditing firms
- now do the DIY drill –

DO-IT-YOURSELF (DIY) DRILL

a. Attribute sampling. c. Procedures to be undertaken in performing the
b. Materiality. audit.
c. The reliability of information. d. Materiality and specific items to be tested.
d. Management fraud.
38. Which of the following parties would normally attend a
34. Auditors are most likely to use the most rigorous audit planning meeting held before the beginning of an audit
procedures to examine engagement to discuss relevant client information and
a. Routine transactions. the audit approach to be taken in performing the
b. Management assertions that are deemed engagement?
to be of low risk. a. Engagement partner and the client’s chief financial
c. Only the rights and obligations officer
assertion. b. Engagement partner and audit manager
d. Management assertions that are deemed c. Engagement partner, audit manager, and senior
to be of high risk. auditor
d. Engagement partner, audit manager, senior
Communicating with TCWG and Management auditor, and junior audit staff members

35. Which of the following is an effective audit planning

procedure that helps prevent misunderstandings and
inefficient use of audit personnel?
a. Arrange to make copies, for inclusion in the audit
files, of those client supporting documents
examined by the auditor.
b. Arrange to provide the client with copies of the
audit programs to be used during the audit.
c. Arrange a preliminary conference with the client to
discuss audit objectives, fees, timing, and other
information.
d. Arrange to have the auditor prepare and post any
necessary adjusting or reclassification entries prior
to final closing.
36. 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. Methods of statistical sampling to be used in
confirming accounts receivable.
b. Pending legal matters to be included in the inquiry
of the client's attorney.
c. Evidence to be gathered to provide a sufficient
basis for the auditor's opinion.
d. Schedules and analyses to be prepared by the
client's staff.
37. 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
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1. Which of the following statements is incorrect about
audit planning documentation?
a. Although the precise form and content of the
overall audit plan (overall audit strategy) may
vary, it should sufficiently be detailed to guide the
development of an audit program.
b. The audit plan and related audit program are not
connected and should no longer be changed once
the audit has started.
c. The audit program should set out the nature,
timing and extent of planned audit procedures
required to implement the overall audit plan.
d. In preparing audit program, the auditor should
consider the specific assessments of inherent and
control risks and the required level of assurance to
be provided by substantive tests.
2. Which of the following tasks is most likely to be
performed by an audit partner?
a. Analyzing a client’s key financial ratios
b. Assessing the quality of the client’s internal
controls
c. Performing substantive tests of key balance sheet
accounts
d. Reviewing the working papers
3. Which of the following tasks is least likely to be
performed by an audit manager assigned to an
engagement?
a. Reviewing working papers prepared by audit staff
members
AT.3006
EXCEL PROFESSIONAL SERVICES, INC.

b. Confirming bank balances

c. Estimating the required allowance for obsolescence 10. Which of the following factors would a CPA ordinarily
of inventories consider in the planning stage of an audit
d. Drafting a management letter at the conclusion of engagement?
an engagement I. Financial statement accounts likely to contain a
misstatement.
4. Which of the following tasks is most likely to be II. Conditions that require extension of audit tests.
performed by a firm partner on an audit team engaged a. I only.
in the examination of the consolidated financial b. II only.
statements of a large corporate client? c. Both I and II.
a. Estimating the required allowance for bad debt d. Neither I nor II.
expense
b. Reviewing the work of junior staff accountants 11. Which of the following is not typically included in initial
c. Preparing the client’s consolidated income tax audit planning?
return a. Client acceptance/continuation decisions, including
d. Advising the client on the choice of accounting use of engagement letter.
policies to be used b. Determination of the purpose of the audit.
c. Obtain an understanding with the client.
5. Which of the following activities would usually be d. Perform analytical procedures as substantive tests.
performed by the manager in a public practice firm? a.
Deciding on the appropriate audit opinion 12. Initial audit planning involves four matters. Which of
b. Liaising with the client with respect to the timing the following is not one of these?
of audit work a. Develop an overall audit strategy.
c. Performing detailed tests of transactions and b. Request that bank balances be confirmed.
balances c. Schedule engagement staff and audit specialists.
d. Meeting with clients and potential clients to discuss d. Identify the client’s reason for the audit.
the firm’s services
13. Early appointment of the independent auditor will
6. How can the audit strategy and audit program best be enable:
described at the beginning of the audit process?
a. a more thorough examination to be performed.
a. Tentative. c. Comprehensive.
b. a proper study and evaluation of internal control to
b. Conclusive. d. Optional. be performed.
c. sufficient competent evidential matter to be
7. Which of the following is not one of the benefits why obtained.
the auditor should properly plan engagements? d. a more efficient examination to be planned.
a. Assist in the proper selection of engagement team
members and the assignment of work to them.
14. Which of the following statements is true with respect
b. Facilitate the direction and supervision of to planning meetings held at the beginning of an audit
engagement team members and the review of engagement and debriefing meetings held at its
their work. conclusion?
c. Assist in coordination of work done by auditors of a. Planning meetings are required by generally
components and experts. accepted auditing standards; debriefing meetings
d. Ensure gathering of sufficient appropriate audit are not so required.
evidence. b. Debriefing meetings are required by generally
accepted auditing standards; planning meetings
8. Which of the following procedures would an auditor are not so required.
least likely perform in planning a financial statement c. Both planning meetings and debriefing meetings
audit? are required by generally accepted auditing
a. Selecting a sample of vendor’s invoices for standards.
comparison to receiving reports d. Neither planning meetings nor debriefing
b. Reading the current year’s interim financial meetings are required by generally accepted
statements auditing standards.
c. Coordinating the assistance of the entity personnel
in data preparation 15. Avoiding misunderstandings with the client is
d. Discussing matters that may affect the audit with important for:
firm personnel responsible for non-audit services
Good client Facilitating high-quality
to the entity
relations work at a reasonable cost
a. Yes Yes
9. Which of the following procedures would an auditor
most likely include in the planning phase of a financial b. No No
statement audit? c. Yes No
a. Obtain an understanding of the entity's risk d. No Yes
assessment process.
b. Identify specific internal control activities designed
to prevent fraud. - end of AT.3006 -
c. Evaluate the reasonableness of the entity's
accounting estimates.
d. Perform cutoff tests of the entity's sales and
purchases.

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