Deck 4: Audit Planning II

Question 1

If inherent risk and control risk are low, the auditor can set detection risk as high.

Answer 1

True

Question 2

Information is considered quantitatively material if it exceeds an auditor's preliminary
materiality assessment.

Answer 2

True

Question 3

Inventory turnover measures how many times a year a company collects cash from its
debtors.

Answer 3

False

Question 4

There is an inverse relationship between audit risk and detection risk as set by the auditor.

Question 5

Materiality is assessed during the planning stage of every audit.

Question 6

By setting a higher planning materiality level, an auditor increases the quality and quantity of
evidence that needs to be obtained.

Question 7

If the client has one or more appropriate controls in place, the audit strategy is to conduct few
or no tests of controls for the identified risk.

Question 8

Companies enter into debt covenants with lenders when taking on significant loans.

Question 9

When a control is effective, the next step is to

A) identify what could go wrong.
B) test the control.
C) perform a walkthrough.
D) reduce reliance on detailed substantive procedures.

Question 10

A walkthrough involves an auditor tracing a transaction through a client's accounting system.

Question 11

When classifying risks, significant consideration is given to whether the risk involves simple
routine transactions.

Question 12

Martin Shawbridge, a manager at Cox, Durham, & Elliott, CA's was given the mandate to deal with the following risks: fraud risks, complex transactions, significant related party
Transactions. How would you classify these risks?

A) audit risk
B) inherent risk
C) control risk
D) significant risk

Question 13

Analytical procedures are conducted at the planning stage of an audit to enhance the
understanding of the auditor's client.

Question 14

Key performance indicators used by a client to monitor its performance provide an auditor
insight into which accounts are potentially at risk of misstatement.

Question 15

When information exceeds an auditor's preliminary materiality assessment, it is deemed to be:

A) performance materiality.
B) specific materiality.
C) quantitatively material.
D) none of the above.

Question 16

Profitability is the ability of a company to pay its debts as they fall due.

Question 17

Audit risk is the risk that a client's system of internal controls will not prevent or detect a
material misstatement.

Question 18

Trend analysis involves a comparison of account balances to a single line item.

Question 19

When Brenda discovered she had a low risk client with low inherent risk and low control risk, how did she set her detection risk?

A) low
B) high
C) medium
D) detection risk is not related to inherent risk and control risk

Question 20

An auditor has gained a detailed understanding of the client's system of internal controls and has conducted extensive tests of those controls. She later assesses control risk as low.
What is she planning to perform?

A) a combined audit strategy
B) an audit of financial controls
C) a substantive audit strategy
D) a modified audit strategy

Question 21

The audit strategy for a client with high inherent risk and high control risk will include:

A) no or very limited tests of controls.
B) decreased reliance on substantive tests.
C) increased testing of controls.
D) increased reliance on controls.

Question 22

Millie Buenavista made the following two statements concerning inherent risk: (i) Inherent risk is the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.
(ii) Inherent risk deals with the susceptibility of the financial statements to material misstatements without considering internal controls.

A) Both statements are correct.
B) Neither statement is correct.
C) Only statement (i) is correct.
D) Only statement (ii) is correct.

Question 23

A transaction walkthrough involves:

A) taking a tour of the client's manufacturing facility.
B) vouching recorded transactions back to the source documents.
C) tracing a transaction through a client's accounting system.
D) none of the above.

Question 24

Emmanuela Zhang was explaining the importance of analytical procedures to her staff. She made two statements:
(i) Analytical procedures are conducted throughout an audit.
(ii) Analytical procedures are an efficient method for estimating account balances.

A) Both statements are correct.
B) Neither statement is correct.
C) Only statement (i) is correct.
D) Only statement (ii) is correct.

Question 25

When classifying risks, significant consideration is not given to whether the risk:

A) is related to significant economic or accounting developments.
B) involves simple transactions.
C) involves significant related party transactions.
D) involves fraud.

Question 26

Qualitative materiality refers to information that:

A) impacts a user's decision-making process due to its magnitude.
B) impacts a user's decision-making process for a reason other than its magnitude.
C) is less than an auditor's preliminary materiality assessment.
D) exceeds an auditor's preliminary materiality assessment.

Question 27

Which of the following statements about materiality is incorrect?

A) The preliminary assessment of materiality guides audit planning and testing.
B) Materiality is used to guide the validity of information contained in the financial statements.
C) Materiality is a key auditing concept that is assessed during the planning stage of every audit.
D) Information is considered material if it has no impact on the decision-making process of financial statement users.

Question 28

If there is a risk that management's assertion that recorded inventory exists is not valid, the auditor will:

A) spend more time testing for the existence of recorded inventory.
B) spend less time testing for the existence of recorded inventory.
C) spend more time testing for the completeness of inventory.
D) not adjust their audit strategy.

Question 29

An audit strategy:

A) is determined by the client.
B) involves determining the amount of time to be spent testing the client's internal controls and conducting detailed substantive testing.
C) sets the scope, timing and direction of the audit.
D) both b and c.

Question 30

An audit strategy will include increased reliance on tests of controls when:

A) inherent risk and control are high.
B) inherent risk and control risk are low.
C) the auditor believes there is a high risk that their client's internal controls will notprevent or detect material misstatements.
D) there is a high susceptibility of assertions to material misstatements.

Question 31

By setting a lower planning materiality level an auditor:

A) decreases the quality and quantity of evidence that needs to be gathered.
B) does not change the audit strategy they use.
C) increases the quality and quantity of evidence that needs to be gathered.
D) can be certain that they will detect all instances of fraud that have occurred.

Question 32

Matthias Holewsky was explaining how important it was for his staff to use analytical procedures in order to cut down on substantive testing. He mentioned two factors that he felt
Were important when conducting analytical procedures:
(i) reliability of client data
(ii) the ability to make comparisons over time
Which of these two factors can help him achieve his objective?

A) (i)
B) (ii)
C) (i) and (ii)
D) neither (i) nor (ii)

Question 33

By setting high detection risk, an auditor will:

A) eliminate the possibility that fraud will be detected.
B) reduce the level of reliance placed on their detailed substantive procedures.
C) increase the level of reliance placed on their detailed substantive procedures.
D) reduce the level of testing of the client's internal control system.

Question 34

An item that is considered material due to its magnitude is referred to as being:

A) quantitatively material.
B) of no interest to the auditor.
C) qualitatively material.
D) none of the above.

Question 35

Which of the following statements is correct about audit risk?

A) It is impossible to completely eliminate audit risk.
B) Audit risk is the risk that an auditor expresses an inappropriate opinion when thefinancial statements are materially stated.
C) Audit risk can be reduced at the planning stage of an audit by identifying the key risks faced by the client.
D) All of the above.

Question 36

Sami Zubair's client does not have in place appropriate controls for a risk he has identified. What should Sami do?

A) Conduct few or no tests of controls.
B) Report the weaknesses to those charged with governance.
C) Increase his reliance on substantive tests.
D) All of the above.

Question 37

By assessing control risk as high, an auditor has determined that their client's system of internal controls:

A) is unlikely to be effective in mitigating inherent risks identified.
B) is very effective at preventing or detecting material misstatements.
C) is very strong.
D) will eliminate the possibility of material fraud or error.

Question 38

Moises Alou has reviewed internal controls at a spring training facility in Florida and has deemed control risk to be high. Which kind of audit strategy may be appropriate for Moises?

A) combined audit strategy
B) substantive audit strategy
C) a and b
D) none of the above

Question 39

Which of the following is an example of an item considered qualitatively material?

A) a change in an accounting method
B) related party transactions
C) being in danger of breaching a debt covenant
D) all of the above

Question 40

Control risk is:

A) the risk that a client's system of internal controls will prevent or detect a material misstatement.
B) the susceptibility of an assertion to a material misstatement assuming there are no related controls.
C) the risk that a client's system of internal controls will not prevent or detect a material misstatement.
D) none of the above.

Question 41

Common measures of a company's profitability include:

A) price-earnings ratio.
B) earnings per share.
C) both a and b.
D) quick ratio.

Question 42

In conducting analytical procedures, which of the following information sources are not generally considered to be reliable?

A) audited information
B) information generated by an accounting system with ineffective internal controls
C) information generated using consistent accounting methods
D) information generated by an accounting system with effective internal controls ANSWERS TO
Item
Ans)
Item
Ans)
Item
Ans)
Item
Ans)
Item
Ans)
Item
Ans)
Item
Ans)

Question 43

Liquidity refers to:

A) the ability of a company to earn a profit.
B) a comparison of account balances to a single line item.
C) the ability of a company to pay its debts when they fall due.
D) none of the above.

Question 44

Explain audit risk and the three components of the audit risk model.

Question 45

Which of the following is an example of a liquidity ratio?

A) gross profit divided by net sales
B) profit divided by average assets
C) cost of sales divided by average inventory
D) current assets divided by current liabilities

Question 46

Describe the profitability and liquidity approaches to measuring a client's performance.

Question 47

Analytical procedures are used at which of the following stages of an audit?

A) final review
B) planning
C) execution
D) all of the above

Question 48

What is the relationship between materiality and audit risk?

Question 49

Discuss the purpose and some common examples of profitability ratios.

Question 50

Which of the following statements regarding key performance indicators (KPIs) is correct?

A) They reflect the success factors of an organization.
B) They can be quantified.
C) Some KPIs are common to many clients, including return on assets.
D) All of the above.

Question 51

Explain the audit approach used by an auditor when they assess control risk as high.

Question 52

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) Roxanne Deboer, the in-charge auditor, was explaining to her junior auditors why she was setting inherent risk high. "It is appropriate to set higher inherent risk for this company as our client is in an industry that is very competitive."
b) In selecting an appropriate materiality base, an auditor can choose an item from the balance sheet or income statement.
c) Tyler Rappaport has mentioned to his staff auditors that audit risk is based on factors that relate to the entity, while materiality is based on the user needs. As a result, materiality and audit risk are two concepts that need to be considered separately when considering material misstatements.
d) Paloma Schenker has determined control risk at a biochem company to be high. She plans to use a combined audit strategy.

Question 53

Which of the following is not an example of a profitability ratio?

A) current ratio
B) gross profit margin
C) return on assets
D) profit margin

Question 54

Analytical procedures are conducted at the planning stage of the audit to:

A) aid in the identification of risk.
B) identify where fraud has occurred.
C) enhance the understanding of a client.
D) both a and c.

Question 55

Which of the following statements relating to debt covenants is incorrect?

A) Covenants are written into loan contracts.
B) If a company breaches a debt covenant it will not need to renegotiate or repay the loan.
C) Covenants restrict a company's activities.
D) Companies enter into debt covenants with banks when they borrow a significant amount.