Deck 6: Audit Planning and Risk Assessment

Question 1

An audit plan will be the same regardless of whether the client company outsources its financial activities to a service provider or conducts the activities in house.

Answer 1

False

Question 2

Scaling the audit refers to fitting the audit work into the proper context in terms of the engagement's size, environment, and complexity.

Answer 2

True

Question 3

A client company's new or modified accounting information system requires more audit effort to understand the new system and assess its design and operating effectiveness.

Answer 3

True

Question 4

Statutory audits are required on all integrated audits performed in accordance with international accounting standards.

Question 5

An IT specialist may be used to inspect systems documentation and perform other procedures for an audit engagement when the client company uses new, emerging technology.

Question 6

The audit plan documents detailed information about audit procedures to be performed on the engagement.

Question 7

A highly effective audit would have all of its testing performed at an interim date.

Question 8

For accounts that involve significant estimates, require a high degree of judgment, or are susceptible to management override of controls, a principal auditor may completely rely on the work of others in determining whether those accounts are materially misstated.

Question 9

Materiality is a measure of magnitude; yet, it is affected by both quantitative and qualitative factors.

Question 10

Computers are the primary resources used on an audit.

Question 11

Preliminary time budget information is compared to actual time worked and is used for purposes of billing, performance evaluation, and future bidding.

Question 12

Development of the audit strategy includes all of the following activities except

A) specifying the work that has to be performed.
B) specifying the timing of the work to be performed.
C) documenting an audit planning memorandum.
D) defining initial estimates of audit risk and materiality.

Question 13

The components of the fraud triangle include incentive, opportunity, and rationalization.

Question 14

Materiality is first set at the account balance level and is then aggregated to the financial statement level.

Question 15

A principal auditor may share responsibility for an audit opinion when another auditor performs all of the audit procedures for subsidiary of the client company.

Question 16

Tracing refers to looking at the supporting documentation for a recorded number.

Question 17

Planning is a continuous process that must occur throughout the audit engagement because

A) disconfirming information is likely to arise.
B) the audit committee is likely to point out flaws in the original audit plan.
C) all information affecting the audit occurs concurrently.
D) auditor skill levels are continuously fluctuating.

Question 18

Risk assessment points the auditor to the important areas of the client's operations and financial statements in order to

A) understand important areas of the client's operations and financial statements.
B) identify potential problems.
C) determine what needs to be accomplished during the audit.
D) all of the above

Question 19

An audit strategy will focus on going concern issues for a client company operating in an industry which has experienced a recent market downturn.

Question 20

Auditors test the operating effectiveness of those controls that are intended to prevent and detect material misstatements.

Question 21

Which of the following is not an area of interest for anti-fraud controls?

A) journal entries and adjustments made in the end-of-period financial reporting process
B) related party transactions
C) auditor credentials
D) significant management estimates

Question 22

Auditors may obtain information about a client company during other engagements conducted for the client such as

A) audits of a subsidiary or other related party entity.
B) reviews of quarterly financial statements filed with the SEC.
C) examinations of information included in a registration statement.
D) All of the above

Question 23

Which of the following is not a consideration for an auditor while "scaling" the audit?

A) The client company has multiple locations throughout the region.
B) Another firm is responsible for auditing one of the client's out-of-town subsidiaries.
C) An outside service provider prepares all of the client company's payroll accounting records.
D) The client company plans to hire and develop employees so that it can prepare its payroll accounting records in-house within the next two years.

Question 24

An experienced audit team will begin planning the audit before it knows all the specific information about a particular client company because

A) experienced auditors know the general framework of what needs to be done on any audit.
B) auditors experienced in the client's industry understand the activities and risks of the industry, which gives them an understanding of the important financial statement accounts and ICFR areas.
C) auditors experienced with this client company have already gained quite a bit of information from the client acceptance or continuance processes.
D) all of the above

Question 25

An internal control that is ineffective to the extent that it might not prevent the financial statements from being materially misstated is referred to as a

A) significant risk
B) substantive error
C) material weakness
D) tolerable misstatement

Question 26

Going concern issues may arise when:

A) Acquisitions or discontinued operations have recently occurred.
B) The accounting information systems have been modified.
C) The economy has negatively impacted the client company.
D) Changes in applicable accounting standards affect the client company.

Question 27

One of the first procedures performed by auditors during on-location audit work is the

A) Development of the firm's audit strategy.
B) Preparation of the audit report.
C) Design of the audit plan.
D) Establishment of an understanding of the company's ICFR systems.

Question 28

Significant developments in the client's external environment that affect audit strategy include:

A) Industry competition has increased.
B) Acquisitions or discontinued operations have recently occurred.
C) A change in ownership and/or capital structure has occurred.
D) All of the above

Question 29

Which of the following would not be an appropriate benchmark to use in setting financial statement-level materiality?

A) a percentage of total revenue
B) a percentage of total assets
C) a percentage of current liabilities
D) a percentage of profit from continuing operations

Question 30

The scope of an audit team's work will be more extensive

A) for a first year audit engagement as opposed to a continuing audit.
B) when internal auditors perform work to be used as evidence by the external auditors.
C) when a user company's auditor relies upon a report provided by an auditor of the service provider.
D) for a company with effective entity-level controls.

Question 31

Deliverables refers to the

A) timing of the auditor's acceptance of the client company.
B) products and services as contracted in the engagement letter.
C) degree of correlation between the audit work to the specific characteristics of the client.
D) auditor's experience in the client's industry.

Question 32

The scope of the engagement depends upon all of the following considerations except the

A) presentation of the client's accounting information.
B) use and importance of IT to the client's activities and ICFR.
C) ability to use audit evidence performed by the client's internal auditors.
D) timing of the client's fiscal year-end.

Question 33

An example of an incentive/pressure for fraudulent financial reporting risk factor is

A) a threat to the client company's financial stability caused by rapid growth compared to that of other companies in the same industry.
B) significant operations located across international borders in jurisdictions where differing business environments exist.
C) inadequate job applicant screening processes for employees with access to cash.
D) ineffective communication of the company's ethical standards by management.

Question 34

Significant developments within the client that affect audit strategy include:

A) A change in ownership and/or capital structure has occurred.
B) Acquisitions or discontinued operations have recently occurred.
C) The accounting information systems have been modified.
D) All of the above

Question 35

When audit clients acquire new, more sophisticated IT systems,

A) The audit strategy will not be impacted as long as the duties of accounting personnel are primarily unchanged.
B) Auditors with advanced IT knowledge may need to be added to the audit team.
C) The design of internal controls will be considered ineffective until those new controls have been tested.
D) The timing of the auditor's procedures for reviewing interim financial statements will be accelerated.

Question 36

Which of the following would not be likely to participate in an audit planning meeting?

A) The core audit engagement team.
B) The audit team's tax manager
C) The audit team's partner for IT
D) The chair of the client's audit committee.

Question 37

The materiality threshold for each account balance or class of transactions is called

A) tolerable misstatement
B) material assertion
C) substantive rule of thumb
D) account deficiency

Question 38

An example of an opportunity for misappropriation of assets risk factor is

A) compensation inconsistent with expectations.
B) lack of complete and timely reconciliations of assets.
C) management's practice of committing to creditors to achieve unrealistic forecasts.
D) known history of violations of laws and regulations.

Question 39

Scaling the audit refers to

A) weighing the risks associated with the client's susceptibility to fraud.
B) preparing evidence for an outside service provider.
C) fitting the audit work to the specific characteristics of the client.
D) delivering products or services as contracted in the engagement letter.

Question 40

For purposes of an integrated audit, materiality is assessed within the context of users who have

A) appropriate knowledge of business and economic activities
B) an understanding that financial statements are prepared and audited to levels of materiality
C) the ability to make appropriate economic decisions on the basis of information in the financial statements
D) all of the above

Question 41

Time budgets are typically

A) approved by the audit committee
B) detailed by areas of the audit
C) signed by the predecessor auditor
D) All of the above.

Question 42

Which of the following is not a relevant consideration in deciding whether an IT specialist is needed:

A) the client company's capital structure
B) the complexity of IT controls and systems
C) the use of emerging technologies
D) the use of data by multiple systems or processes

Question 43

When audit tests are performed at an interim date, the auditor must

A) obtain a letter from management to confirm the continued performance of internal controls and accuracy of the year-end balances.
B) perform roll forward audit procedures to determine whether a control continued to perform the same way through year-end.
C) reconcile account balances tested at an interim date with the year-end balances in the same accounts.
D) Both b) and c)

Question 44

What is the primary resource used on an audit engagement?

A) the client's IT systems
B) the auditor's IT systems
C) human resources of the audit firm
D) the client's internal auditors

Question 45

Which of the following items in not typically documented in an audit planning memo?

A) audit engagement objectives and deliverables
B) the auditors' understanding of ICFR and IT systems
C) planned use of the work of others during the audit
D) results of the quarterly review process

Question 46

If audit tests are performed at an interim date, supplemental audit evidence:

A) is not necessary because the same controls are assumed to be in place that resulted in the balances tested during interim.
B) is still needed regarding the account balances between the interim testing date and the end of the fiscal year.
C) is obtained from the predecessor auditor, when needed to corroborate any changes in the client's ICFR systems.
D) is the responsibility of the audit committee, as it would be inefficient for the auditors to focus on a single audit area during multiple time periods.

Question 47

Which of the following items are included in the audit planning meeting?

A) brainstorming about fraud risks
B) establishing responsibility for preparing the financial statements
C) establishing responsibility for monitoring of internal controls
D) preparing the engagement letter.

Question 48

Which of the following is an example of a specialist who might assist an audit engagement team on a high-risk audit area?

A) actuary
B) banker
C) internal auditor
D) tax accountant

Question 49

It is important for auditors to be on-location on the last day of the client's fiscal year when the client

A) operates a restaurant that does a considerable amount of business on New Year's Eve.
B) has significant inventory activities such that the receipts and shipments of inventories at year-end should be observed.
C) relies upon electronic verification to indicate the timing of transactions.
D) refuses to pay overtime rates for the audit team during its busy season.

Question 50

Which of the following items would an audit engagement partner likely communicate with the members of his or her audit team during a planning meeting?

A) Responsibility for notifying appropriate individuals of any significant issues or difficulties encountered during the audit.
B) Identification of the type of audit report to be issued.
C) The need to complete the quarterly review before communicating with any tax professionals assigned to the audit engagement.
D) Responsibility for notifying the audit committee and internal auditors of the firm's specific audit approach.

Question 51

Substantive audit procedures are performed so that the auditor may identify

A) deficiencies in the design or operating effectiveness of internal controls.
B) weaknesses in the effectiveness of the client company's audit committee.
C) material misstatements in the client company's financial statements.
D) Calculations and controls that mitigate the risk of fraud.

Question 52

ICFR tests to provide evidence on whether the controls can be relied upon for the financial statement audit can be performed

A) only during year-end because they must be performed at the same time as financial statement audit procedures.
B) only during interim because they must be performed at the same time as financial statement audit procedures.
C) at any time the evidence is available, as long as the entire period of reliance is evaluated.
D) at any time after the substantive procedures have been completed, so that the opinion on financial statement misstatements is not superceded by the opinion on the effectiveness of controls.

Question 53

Which of the following is not a valid reason for the performance of audit procedures at an interim date?

A) More time is available for management to correct identified by interim audit testing.
B) The client company does not retain the records that are needed as audit evidence through the year-end time frame.
C) Most controls and transactions cannot be audited during busy season.
D) More time is available for the auditors to concentrate on problem areas, if needed.

Question 54

Which of the following is not a form of audit evidence?

A) recalculation
B) reperformance
C) repetition
D) inquiry

Question 55

The document that presents all of the issues discussed as part of audit strategy is the

A) engagement letter
B) quarterly financial statements
C) audit planning memo
D) risk assessment memo

Question 56

To properly instruct and review the work of audit team members, the supervising auditor must:

A) keep abreast of accounting and audit issues and manage differences of opinion among team members regarding audit findings.
B) obtain instruction from the chair of the audit committee regarding the objectives of the audit engagement.
C) communicate with the predecessor auditor regarding differences of opinion regarding prior year audit findings.
D) all of the above

Question 57

Auditors test the operating effectiveness of internal controls only if they

A) are effectively designed to prevent or detect material misstatements.
B) address multiple risk factors.
C) are applied in conjunction with other controls to address a single risk factor.
D) cause susceptibility to material misstatements.

Question 58

The audit planning meeting must

A) take place before the client acceptance decision is made.
B) be attended by the entire core engagement team and the predecessor auditors.
C) establish an understanding among the members of the audit team about the objectives of the audit.
D) prepare the internal auditors for the work they will be asked to perform to supplement the auditor's procedures.

Question 59

Audit firms use time budgets for

A) indicating the amount of time expected for the various levels of auditors for each audit area.
B) tracking and reporting time spent on each audit area.
C) billing and bidding and future engagements.
D) All of the above.

Question 60

An IT specialist may be involved in an audit engagement to assist with any of the following except

A) inspecting systems documentation.
B) inquiring of company personnel about how the processes are carried out and how IT controls are designed.
C) preparing the IT planning memo.
D) planning the tests of IT controls.

Question 61

If internal auditors provide direct assistance to the external audit team, the independent external auditor must

A) reperform all of the work provided by the internal auditors.
B) supervise and evaluate the work performed by the internal auditors.
C) refuse to issue an audit opinion, due to a lack of independence.
D) indicate a division of responsibility in the performance of the audit.

Question 62

For each scenario below, indicate which element of the fraud triangle is present.
(a) Large amounts of cash are on hand.
(b) Management failed to correct ICFR deficiencies in a timely manner.
(c) The organizational structure is complex and lines or authority are unclear.
(d) Future employee layoffs are expected.
(e) Employee behavior suggests dissatisfaction with the company.
(f) Restrictions on the auditor limit access to evidence.
(g) Management attempts to influence the scope of the audit work.
(h) Industry factors threaten the company's financial stability.
(i) Significant related party transactions are audited by another firm.
(j) The personal financial situation of management is threatened.

Question 63

The nature, timing, and extent of audit needed audit tests will depend upon the answers to each of the following questions except

A) How could a material misstatement happen?
B) What internal controls has the client implemented to address potential misstatements?
C) How might internal controls fail such that a material misstatement occurs?
D) How many times have material misstatements been undetected?

Question 64

A principal auditor may share responsibility for an audit opinion with

A) another independent auditor who has performed a significant portion of the audit work.
B) the client's internal audit staff, if they provide significant assistance to the audit team.
C) a specialist who provides expert advice on the valuation of inventory.
D) an attorney who provides expert advice on a pending legal matter.

Question 65

When inquiry, observation, and inspection are all used to trace a transaction as it is initiated, authorized, processed, and recorded, the process is called a(n)

A) inspection
B) walkthrough
C) assertion
D) analytical procedure

Question 66

Which of the following is not a form of evidence obtained through the auditor's direct personal knowledge?

A) observation
B) reperformance
C) inquiry
D) inspection

Question 67

Following are the planning steps involved in considering materiality in a top-down approach to planning for tests of controls. Number the items in from 1 (top) through 6 (bottom) to indicate the proper top-down sequence of the steps.
___ Identify risks that could cause material misstatement of relevant assertions in a significant account.
___ Set financial statement level materiality
___ Design audit procedures addressing controls
___ Investigate controls addressing risks
___ Identify significant accounts
___ Determine relevant management assertions for significant accounts and set materiality at the account level
Short-Answer Questions and Exercises

Question 68

Which of the following is not an indicator of competence that is relevant to an auditor's evaluation of other individuals performing a portion of the audit work?

A) professional certification
B) professional experience
C) level of education
D) access to the board of directors

Question 69

If an audit program calls for the auditor to interview the client about an important control activity, this is an example of which type of audit procedure?

A) reperformance
B) tracing
C) inspection
D) inquiry

Question 70

Sufficient evidence may be provided without examining all of the transactions in an account balance is the auditor uses well-designed

A) sampling approaches
B) internal control procedures
C) inspection techniques
D) assertions related to the fair presentation of account balances.