St.

Columban College
Pagadian City

ACCTG 304
Auditing and Assurance Principles
Practice Questions

Module 5: Audit Planning

1. The development of a general strategy and a detailed approach for the expected nature, timing, and extent of
audit refers to :
A. Supervision C. Audit procedures
B. Directing D. Planning

2. Which of the following procedures would an auditor most likely perform in planning a financial statement
audit?
A. Inquiring of the client’s legal counsel concerning pending litigation.
B. Comparing the financial statements to anticipated results.
C. Examining computer generated exception reports to verify the effectiveness of internal controls.
D. Searching for unauthorized transactions that may aid in detecting unrecorded liabilities.

3. Which of the following statements is correct concerning analytical procedures?

A. Analytical procedures usually involve comparisons of ratios developed from recorded amounts to
assertions developed by management.
B. Analytical procedures used in planning an audit generally use data aggregated at a high level.
C. Analytical procedures can replace tests of controls in gathering evidence to support the assessed level of
control risk.
D. Analytical procedures are more efficient, but not more effective, than tests of details and transactions.

4. The risk that the assertion contains material misstatements that, when aggregated with misstatements in other
assertions, could make the entire financial statements materially misstated is:
A. Audit risk C. Inherent risk
B. Control risk D. Detection risk

5. Which of the following is an aspect of scheduling and controlling the audit engagement?
A. Including in the audit program a column for estimated and actual time.
B. Performing audit work only after the client’s books of account have been closed for the period under
examination.
C. Writing a conclusion in individual working papers indicating how the results of the audit will affect the
auditor’s report.
D. Including in the engagement letter an estimate of the minimum and maximum audit fee.

6. 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.
7. 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.

8. Which of the following is least likely considered by the auditor in developing the overall audit plan?
A. Understanding of the accounting and internal control systems.
B. Relevant risk and materiality.
C. The involvement of other auditors in the audit of major component of financial statements
D. The general level of competence of audit assistants.

9. The auditor should have or obtain a 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 an effect on financial statements.
D. Have an overall evaluation of whether financial assertions are fairly presented in the financial statements.

10. Which of the following will most likely help the auditor to identify and understand the events, transactions and
practices of his audit client?
A. Obtaining a sufficient knowledge of the business of his client.
B. Understanding of accounting and internal control.
C. Testing control policies and procedures.
D. Obtaining a representation letter from the client management.

11. Which of the following is not considered by the CPA when he makes an overall audit plan?
A. Identification of complex accounting areas including those involving accounting estimates.
B. The information technology used by the client.
C. The content of the representation letters.
D. The nature and timing of reports or other communication with the entity that are expected under the
engagement.

12. Which of the following least likely affect the form and content of the overall audit plan?
A. Complexity of the audit engagement.
B. Methodology and technology used by the auditor.
C. The entity’s form of business organization.
D. The size of the entity.

13. The audit program should contain the following, except:

A. Audit objective
B. Time budget for the various audit areas
C. Set of planned audit procedures
D. The combined assessed level of inherent and control risk

14. The auditor is not expected to have

A. A particular knowledge of the economy and the industry within which the entity operates.
B. A particular knowledge of how the entity operates.
 C. A level of knowledge of business ordinarily less than that possessed by management.
D. A knowledge of business which is used in assessing inherent and control risk.

15. The auditor obtains knowledge of client’s business

A B C D
Prior to acceptance of engagement No No Yes Yes
Planning stage of the audit Yes Yes Yes No
Testing of transactions stage No Yes Yes Yes
16. Understanding the business and using this information appropriately assists the auditor in, except:
A. Deciding whether to do tests of controls.
B. Evaluating audit evidence.
C. Assessing risks and identifying potential problems.
D. Planning and performing the audit effectively and efficiently.

17. 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.

18. A knowledge of the business is a frame of reference within which the auditor exercises professional judgment.
This assists the auditor in carrying out the following objectives, except:
A. Assessing risks and identifying problems.
B. Evaluating audit evidence.
C. Determining the audit opinion to be expressed.
D. Planning and performing the audit effectively and efficiently.

19. Throughout the course of the audit, the auditors make judgment about many matters where knowledge of the
business is important. These procedures do not include:
A. Evaluating accounting estimates and management representations.
B. Identifying related parties and related party transactions.
C. Assessing inherent and control risks.
D. Assessing the appropriateness of using statistical sampling instead of judgmental sampling.

20. Which of the following is a correct statement?

A. The auditor should use professional judgment to assess audit risk and to design audit procedures to ensure it
is eliminated.
B. The auditor is an insurer, and his or her report constitutes a guarantee.
C. The subsequent discovery that a material misstatement exists in the financial statements is evidence of
inadequate planning, performance, or judgment on the part of the auditor.
D. The auditor should obtain an understanding of the accounting and internal control systems sufficient to plan
the audit and develop an effective audit approach.

21. Audit risk is defined as:

A. The susceptibility of an account balance or class of transactions to misstatement that could be material,
individually or when aggregated with misstatements in other balances or classes, assuming that there were
no related internal controls.
 B. The risk that a misstatement, that could occur in an account balance or class of transactions and that could
be material, individually or when aggregated with misstatements in other balances or classes, will not be
prevented or detected and corrected on a timely basis by the accounting and internal control systems.
C. The risk that an auditor’s substantive procedures will not detect a misstatement that exists in an account
balance or class of transactions that could be material, individually or when aggregated with misstatements
in other balances or classes.
D. The risk that the auditor gives an inappropriate audit opinion when the financial statements are materially
misstated.

22. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are:
A. Elements of audit risk while detection risk is not.
B. Changed at the auditor’s discretion while detection risk is not.
C. Considered at the individual account-balance level while detection risk is not.
D. Functions of the client and its environment while detection risk is not.

23. Which of the following is an incorrect statement?

A. Detection risk is a function of the effectiveness of an auditing procedure and its application.
B. Detection risk arises partly from uncertainties that exist when the auditor does not examine 100 percent of
the population.
C. Detection risk arises partly because of other uncertainties that exist even if the auditor were to examine 100
percent of the population.
D. Detection risk exists independently of the audit of the financial statements.

24. Which of the following is an incorrect statement?

A. Detection risk cannot be changed at the auditor’s discretion.
B. If individual audit risk remains the same, detection risk bears an inverse relationship to inherent and control
risks.
C. The greater the inherent and control risks the auditor believes exists, the less detection risk that can be
accepted.
D. The auditor might make separate or combined assessments of inherent risk and control risk.

25. Why would the auditor assess control risk?

A. Because it indicates where inherent risk may be the greatest.
B. Because it determines whether sampling risk is sufficiently low.
C. Because it affects the level of detection risk the auditor may accept.
D. Because it includes the aspects of nonsampling risk that are controllable.

26. The relationship between acceptable level of detection risk and the combined level of inherent and control risk
is:
A. Direct C. Inverse
B. Parallel D. Independent

27. The audit risk model consists of: AR = IR x CR x DR

The detection risk is the dependent variable. What is the acceptable level of detection risk if the assessed level of
Inherent risk is High and the Control risk is Low?
A. Highest C. Medium
B. Lower D. Higher
28. An auditor decides to increase the assessed level of control risk from that originally planned on the basis of
audit evidence gathered and evaluated. To achieve an overall audit risk level that is substantially the same as
the planned audit risk level, the auditor would:
A. Decrease substantive testing. C. Increase inherent risk.
B. Increase materiality levels. D. Decrease detection risk.

29. PSA 315 requires:

A. The auditor to obtain an understanding of the entity and its environment, including its internal control.
B. Discussion among the engagement team about the susceptibility of the entity’s financial statements to
material misstatement.
C. The auditor to identify and assess the risks of material misstatement at the financial statement and assertion
levels.
D. All of the above.

30. Which of the following conditions and events may most likely indicate the existence of risks of material
misstatement?
A. Having personnel with appropriate accounting and financial reporting skills.
B. Accounting measurements that involve simple processes.
C. Significant amount of routine or systematic transactions.
D. Constraints on the availability of capital and credit.
31. The auditor should perform the following risk assessment procedures to obtain an understanding of the entity
and its environment, including its internal control, except:
A. Inquiries of management and others within the entity.
B. Inquiries of the entity’s external legal counsel or of valuation experts that the entity has used.
C. Analytical procedures.
D. Observation and inspection.

32. The main purpose of risk assessment procedures is to:

A. 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. Test the operating effectiveness of controls in preventing, or detecting and correcting, material
misstatements at the assertion level.
C. Detect material misstatements at the assertion level.
D. All of the above.

33. Having evaluated inherent risk and control risk, the auditor determines detection risk:
A. As the complement of overall audit risk.
B. By performing substantive audit tests.
C. As a product of further study of the business and industry and application of analytical procedures.
D. At a level that equates the joint probability of inherent risk, control risk, and detection risk with overall
audit risk.

34. Which of the following is not a factor that affects the auditor's judgment, during audit planning, as to the
quantity, type, and content of working papers?
A. The auditor's preliminary assessment of control risk.
B. The auditor's preliminary evaluation of inherent risk based on discussions with the client.
C. The nature of the client’s business.
D. The type of report to be issued by the auditor.
35. How can the audit program best be described at the beginning of the audit process?
A. Tentative. C. Conclusive.
B. Comprehensive. D. Optional.

36. The probability of an auditor's procedures leading to the conclusion that a material error does not exist in an
account balance when, in fact, such error does exist is referred to as:
A. Prevention risk. C. Inherent risk.
B. Control risk. D. Detection risk.
37. Which of the following concepts is most useful in assessing the scope of an auditor's program relating to
various accounts?
A. Attribute sampling. C. Materiality.
B. The reliability of information. D. Management fraud.

38. Which of the following is not a component of audit planning?

A. Observing the client's annual physical inventory taking and making test counts of selected items.
B. Making arrangements with the client concerning the timing of audit field work and use of the client's staff
in completing certain phases of the examination.
C. Obtaining an understanding of the business.
D. Developing audit programs.

39. Which of the following conditions supports an increase in detection risk?

A. Internal control over cash receipts is excellent.
B. Application of analytical procedures reveals a significant increase in sales revenue in December, the last
month of the fiscal year.
C. Internal control over shipping, billing, and recording of sales revenue is weak.
D. Study of the business reveals that the client recently acquired a new company in an unrelated industry.

40. Inherent risk is defined as the susceptibility of an account balance or class of transactions to error that could be
material assuming that there were no related internal controls. Of the following conditions, which one does not
increase inherent risk?
A. The client has entered into numerous related party transactions during the year under audit.
B. Internal control over shipping, billing, and recording of sales revenue is weak.
C. The client has lost a major customer accounting for approximately 30% of annual revenue.
D. The board of directors approved a substantial bonus for the president and chief executive officer, and also
approved an attractive stock option plan for themselves.

41. Why should the auditor plan more work on individual accounts as lower acceptable levels of both audit risk
and materiality are established?
A. To find smaller errors.
B. To find larger errors.
C. To increase the tolerable error in the accounts.
D. To decrease the risk of overreliance.

42. Which of the following statements concerning materiality thresholds is incorrect?

A. Aggregate materiality thresholds are a function of the auditor's preliminary judgments concerning audit
risk.
B. In general, the more misstatements the auditor expects, the higher should be the aggregate materiality
threshold.
 C. The smallest aggregate level of errors or fraud that could be considered material to any one of the financial
statements is referred to as a "materiality threshold."
D. Materiality thresholds may change between the planning and review stages of the audit. These changes
may be due to quantitative and/or qualitative factors.

43. An abnormal fluctuation in gross profit that might suggest the need for extended audit procedures for sales and
inventories would most likely be identified in the planning phase of the audit by the use of:
A. Tests of transactions and balances. C. A preliminary review of internal control.
B. Specialized audit programs. D. Analytical procedures.

44. Audit risk consists of all but the following components:

A. Inherent risk. C. Detection risk.
B. Substantive risk. D. Control risk.

45. The auditor notices significant fluctuations in key elements of the company's financial statements. If
management is unable to provide an acceptable explanation, the auditor should:
A. Consider the matter a scope limitation.
B. Perform additional audit procedures to investigate the matter further.
C. Intensify the examination with the expectation of detecting management fraud.
D. Withdraw from the engagement.

46. Which of the following statements is true with regard to the relationship among audit risk, audit evidence, and
materiality?
A. The lower the inherent risk and control risk, the lower the aggregate materiality threshold.
B. Under conditions of high inherent and control risk, the auditor should place more emphasis on obtaining
external evidence and should reduce reliance on internal evidence.
C. Where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk.
D. Aggregate materiality thresholds should not change under conditions of changing risk levels.

47. Which of the following models expresses the general relationship of risks associated with the auditor's
evaluation of internal control (CR), study of the business and application of analytical procedures (IR), and
overall audit risk (AR), that would lead the auditor to conclude that additional substantive tests of details of
an account balance are not necessary?
IR CR AR
A. 20% 40% 10%
B. 20% 60% 5%
C. 10% 70% 4.5%
D. 30% 40% 5.5%

48. Which of the following is not a primary consideration when assessing inherent risk?
A. Nature of client’s business C. Degree of separation of duties
B. Existence of related parties D. Susceptibility to defalcation

49. The audit risk model is used primarily:

A. For planning purposes in determining how much evidence to accumulate.
B. To test the effectiveness of controls.
C. To determine the type of opinion to express.
D. To evaluate the evidence which has been gathered.
50. Which of the following matters would least likely appear in the audit program?
A. Specific procedures that will be performed.
B. Specific audit objectives.
C. Estimated time that will be spent in performing certain procedures.
D. Documentation of the accounting and internal control systems being reviewed.