AUDITING PLANNING
I. SHORT ANSWER QUESTIONS:
1. What is the purpose of audit planning?
2. "An audit plan is desirable when new staff members are assigned to an engagement, but an experienced auditor should be able to conduct an audit without reference to it". Do you agree? Explain why?
3. What factors should an external auditor use to assess the objectivity and competence of internal auditors?
4. What are some limitations of the audit risk model?
5. What is the responsibility of the auditor when it comes to fraud in a financial statement audit?
II. TRUE OR FALSE: Write the word TRUE for each correct statement; otherwise, write FALSE.
1. __________ Audit risk is the auditor's exposure to loss or injury of his or her reputation from events arising in connection with financial statements audited.
2. __________ Audit risk and materiality significantly impact the auditor's decisions about how much and what kind of evidence to gather.
3. __________ Materiality is based on a quantitative analysis of the financial statements only.
4. __________ In order to properly preplan the audit, the auditor must determine the engagement team requirements and ensure the independence of the audit team and audit firm.
5. __________ Analytical procedures used in planning are required by auditing standards.
6. __________ When an auditor decides there is higher inherent risk for an account, one potential effect is that more audit evidence will be required for that account.
7. __________ As acceptable audit risk is decreased, the likely cost of conducting an audit increases.
8. __________ An auditor must evaluate a specialist's professional qualifications and understand the objectives of the specialist's work
9. __________ There is no precise definition of materiality in the professional literature.
10. __________ The presence of fraud risk factors increases the likelihood of fraud and usually suggests that fraud is present.
III. MULTIPLE CHOICE QUESTIONS: Read each item carefully. Select the correct/best answer for each of the following questions and write the letter of your choice before the number.
1. Adequate planning of the audit work helps the auditor of accomplishing the following objectives, except:
A. Gathering of all corroborating audit evidence.
B. Ensuring that appropriate attention is devoted to important areas of the audit.
C. Identifying the areas that need a service of an expert.
D. The audit work is completed efficiently.
2. Which of the following is the ultimate concern of the knowledge about the business?
A. Consideration of how it affects the financial statements taken as a whole.
B. Assists the auditor in enforcing quality control procedures.
C. To assure that sufficient audit evidence is obtained.
D. It assists in determining the type of audit report to be issued.
3. Which of the following statements reflects an auditor's responsibility for detecting errors and fraud?
A. An auditor is responsible for detecting employee errors and simple fraud, but not for discovering fraudulent acts involving employee collusion or management override.
B. An auditor should plan the audit to detect errors and fraud that are caused by departure from PFRS.
C. An auditor is not responsible for detecting errors and fraud unless the application of PSA would result in such detection.
D. An auditor should design the audit to provide reasonable assurance of detecting errors and fraud that are material to the financial statements.
4. The extent of planning will vary according to any of the following, except
A. size of the audit client
B. auditor's experience with the entity and knowledge of the business
C. the nature and complexity of the audit engagement
D. the assessed level of control risk
5. The auditor should have or obtain knowledge of the client's business sufficient to
A. Evaluate whether the financial statements are materially misstated
B. Document material weaknesses in accounting and internal control systems
C. Identify and understand events, transactions and practices that may have effect on financial statements
D. Have an overall evaluation of whether financial assertions are fairly presented in the financial statements
6. Analytical procedures used in planning an audit should focus on
A. identifying material weaknesses in the internal control structure
B. enhancing the auditor's understanding of the client's business
C. testing individual account balance that depend on accounting estimates
D. evaluating the adequacy of evidence gathered concerning unusual balances
7. In which of the following instances would an auditor be least likely to require the assistance of an expert?
A. Assessing the value of inventories of works of art
B. Determining the value of unlisted securities
C. Determining the quantities of materials stored in piles
D. Determining the assessed value of fixed assets
8. Which of the following is an example of fraudulent financial reporting?
A. Company management improperly records as revenue the proceeds of loan
B. The treasurer diverts customer payments to his personal use, concealing his actions by debiting an expense account
C. An employee steals inventory and the "shrinkage" is recorded in cost of goods sold
D. An employee bills his company for products not received, using the name of fictitious suppliers
9. Which of the following statements concerning NOCLARs by clients is true?
A. An auditor's responsibility for material misstatement caused by NOCLARs that have a direct and material effect on the financial statements is the same as that for errors and fraud.
B. An audit in accordance with PSA normally includes audit procedures specifically designed to detect NOCLARs that have an indirect but material effect on the financial statements.
C. An auditor considers NOCLARs from the perspective of the reliability of management's representations rather than their relation to audit objectives derived from the financial statement assertions.
D. An auditor has no responsibility to detect NOCLARs by clients that have an indirect effect on the financial statements.
10. As the materiality level is set at a lower amount, audit risk ____________, while the amount of substantive tests _____________.
A. Increases, decreases C. Increases, increases
B. Decreases, increases D. Decreases, decreases
IV. SITUATIONAL PROBLEMS
I. Geraldine is evaluating audit risk on the FMG engagement. Identify the risk component (Inherent, Control or Detection Risks) most directly affected and indicate what effect (Increase or Decrease) the situation described would have on this risk.
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Risk Component Effect on Risk 1. The purchasing agent is required to obtain approval from senior management for purchases in excess of P5,000. 2. A good portion of FMG's fixed asset base consists of capitalized leasehold items. 3. FMG keeps a large quantity of cash on hand. 4. FMG's computer applications are not protected by password. 5. FMG's financial statements do not require use of significant estimates....
II. For each of the following items, select the type of fraud (FFR- Fraudulent Financial Reporting or MOA - Misappropriation of Assets) and the related fraud risk factor (Pressure, Opportunity or Rationalization).
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1. FMG's Board of Directors is controlled by Morris, the majority stockholder, who also acts as chief executive officer. 2. FMG does not appropriately monitor its internal controls. 3. During 2020, FMG obtained a loan from Piggy National Bank. Morris has personally guaranteed this loan. 4. In an effort to increase the company's visibility before they go public, FMG has issued various press releases projecting significant earnings growth for the current year. 5. Numerous office equipment leases have been signed during 2020 with company owned by Morris' sister Type of Fraud Fraud Risk Factor ...