Question 1

Which of the following would be included in the audit strategy document?

Accepted Answer

The audit strategy document outlines the overall approach to the audit, including the combination of substantive testing and tests of control that will be used. The other options may be included in other audit planning documents, such as the audit plan or the internal control documentation, but are not typically part of the audit strategy document.

Question 2

An auditor compares this year's revenues and expenses with those of the previous year and investigates all changes exceeding 10 per cent.By carrying out this procedure the auditor would be most likely to learn that:

Accepted Answer

This procedure is likely to reveal changes in accounting policies, such as a change in the capitalisation policy for small non-current assets, as it would affect the comparison of expenses year over year.

Question 3

Which of the following tends to be most predictable for purposes of analytical procedures applied as substantive tests?

Accepted Answer

Relationships involving income statement accounts tend to be more predictable due to the recurring nature of revenue and expense transactions, which makes them useful for analytical procedures in substantive tests.

Question 4

Analytical procedures are:

Accepted Answer

Analytical procedures are required during the planning phase to understand the entity and its environment and during the overall review stage of the audit to assist in forming an overall conclusion on the financial report. They are not mandated for substantive testing but can be used at the auditor's discretion.

Question 5

Which of the following actions is the most likely first step that an auditor will perform after accepting an initial audit engagement?

Accepted Answer

The most likely first step that an auditor will perform after accepting an initial audit engagement is to tour the client's facilities and review the general records. This step will provide the auditor with a better understanding of the client's business operations, internal control environment, and accounting system. It also helps the auditor to assess the risks of material misstatement and plan the audit accordingly. Therefore, option C is the best choice. Option A is incorrect because the auditor cannot prepare the financial report as this is the responsibility of the client's management. Option B is incorrect because assessing control risk is a part of the planning process and cannot be done without first reviewing the general records. Option D may be done after touring the client's facilities and reviewing the records.

Question 6

An audit program should be designed for each individual audit and should include audit steps and procedures to:

Accepted Answer

The main purpose of an audit program is to ensure an efficient and effective audit process. While detecting fraud and identifying internal control weaknesses are important objectives of an audit, ensuring that only material items are audited is not the primary objective of an audit program.

Question 7

Analytical procedures that are required in all audits of financial reports are analytical procedures:

Accepted Answer

Analytical procedures are required at the planning stage to understand the entity and its environment and at the overall review stage to assess the conclusions drawn from audit evidence. These procedures are not mandated for specific assertions or solely because they are efficient, effective, or based on available data, but they are a necessary part of the audit process at the beginning and end of an audit.

Question 8

Which of the following procedures is not a typical analytical procedure?

Accepted Answer

Comparison of recorded amounts of major disbursements with appropriate invoices is a test of details procedure, not an analytical procedure. Analytical procedures are used to study relationships and trends in financial information, whereas test of details procedures are used to test the accuracy and completeness of individual transactions and account balances. A, B, and D are all analytical procedures commonly used by auditors.

Question 9

Which of the following is not a benefit of analytical procedures?

Accepted Answer

Analytical procedures do not provide adjustments to error levels during tests of control. This option refers to substantive procedures. The other options are all benefits of analytical procedures.

Question 10

An example of an analytical procedure is the comparison of:

Accepted Answer

Analyzing financial information with similar information regarding the industry in which the entity operates is an analytical procedure. This helps to identify any significant deviations and can help in making a comparison and evaluating the financial position of an entity in the industry. Option A and C are not analytical procedures, while option B refers to statistical sampling which is not necessarily an analytical procedure in itself.

Question 11

Time budgets on audit engagements are not used for which of the following reasons?

Accepted Answer

Time budgets on audit engagements are not used to ensure that audit staff working on the engagement are paid the correct amount. Salaries are typically determined independently of the time budget and are not based on actual hours worked. Time budgets are used to monitor actual audit hours worked by staff on an engagement, to ensure that adequate time is allocated to significant areas of the audit, and to estimate an appropriate fee for the engagement.

Question 12

One reason why the independent auditor performs analytical procedures of the client's operations is to identify:

Accepted Answer

Analytical procedures are used to identify unusual transactions that may indicate errors or fraudulent activity. These procedures involve comparing financial information to expectations based on prior periods or industry standards, and any significant deviations are further investigated.

Question 13

In applying analytical procedures, the identification of the relationships and types of data used, as well as conclusions reached when recorded amounts are compared to expectations, requires:

Accepted Answer

Analytical procedures require the auditor to exercise judgment in identifying relationships and types of data used, as well as forming conclusions when comparing recorded amounts to expectations. This is based on the auditor's understanding of the business and industry, and their assessment of the reliability and relevance of the data used. Senior audit team members may participate in the process, but the ultimate responsibility lies with the auditor. Complex models and advanced training in plausibility formulation may be helpful, but are not essential for performing analytical procedures effectively.

Question 14

Analytical procedures may be classified as being primarily:

Accepted Answer

Analytical procedures are primarily used as substantive tests that help auditors to assess the reasonableness of account balances, transactions, and other financial information. They involve comparison of recorded amounts with expected or benchmark values derived from other financial data. This helps in detecting discrepancies or unusual fluctuations that require further investigation. Analytical procedures are not tests of control, detailed tests of balances, or tests of ratios, although these techniques may be used in combination with analytical procedures.

Question 15

Which of the following items is not an important consideration in an auditor's evaluation of an entity's business risk?

Accepted Answer

Auditing standards do require the auditor to evaluate the entity's business risk, but not necessarily to provide suggestions to improve profitability. The auditor's focus is on assessing the risk of material misstatement in the financial statements due to business risks faced by the entity.

Question 16

The auditor generally gives most emphasis to ratio and trend analysis in the examination of:

Accepted Answer

Ratio and trend analysis are used to evaluate the relationships between items in the income statement, such as revenue and expenses, gross profit margin, operating profit margin, and net profit margin. This analysis helps the auditor identify any unusual fluctuations or trends that may indicate financial statement fraud, errors, or irregularities. While the auditor may also use ratio and trend analysis for other financial statement items, the income statement generally receives more emphasis because it provides a key measure of a company's operating performance and profitability.

Question 17

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:

Accepted Answer

The auditor should obtain knowledge of matters that relate to the nature of the entity's business to be able to plan and perform the audit effectively. This may involve consulting with experts or engaging additional staff with relevant expertise, but the auditor should not refer the entire audit to another auditor unless there are specific reasons for doing so, such as legal or regulatory requirements. The auditor should also inform management of any significant limitations to the audit scope, but it is premature to state that an unmodified opinion cannot be issued before conducting the necessary procedures.

Question 18

An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?

Accepted Answer

The answer of An unexplained decrease in the ratio of...

Question 19

Analytical procedures used in planning an audit should focus on identifying:

Accepted Answer

Analytical procedures used in planning an audit should identify areas that may represent specific risk relevant to the audit. This helps the auditor to focus on the areas that are more likely to have material misstatements and design the audit procedures accordingly. While the predictability of financial data from individual transactions and the various assertions embodied in the financial report are important factors to consider during the audit, they are not the primary focus of analytical procedures used in planning the audit. Material weaknesses in internal control are also important to consider, but this is typically done later in the audit process during the evaluation of internal control.

Question 20

The auditor is most likely to rely on analytical procedures alone if a balance is:

Accepted Answer

Analytical procedures alone are most likely to be relied upon when a balance is immaterial and internal controls are good, as this reduces the risk of material misstatements and increases the effectiveness of analytical procedures in detecting potential misstatements.

Quiz 5: Planning, Understanding the Entity and Assessing Business Risk