ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 42  October 2021 CPA Licensure Exam  Week No. 6

AUDITING (Auditing Theory) J. Ireneo  M. Ngina  F. Tugas  F. Yabut

AT-07: FS AUDIT PROCESS – AUDIT PLANNING

1. Evaluate the following statements:
I. To ensure appropriate attention is devoted to different areas of the audit.
II. To ensure the audit is completed within budget and time restraints.
Which is/are the main purpose of audit planning?
A. I only
B. II only
C. Both I and II
D. Neither I nor II

2. Which of the following statements is/are correct with regard to the relationship between the audit
plan and the audit strategy for an external audit engagement?
I. The overall audit strategy should be more detailed than the audit plan.
II. The audit strategy should be established before the detailed audit plan is developed
A. I only
B. II only
C. Both I and II
D. Neither I nor II

3. Evaluate the following statements:

I. Substantive tests prior to the balance sheet date will be minimized.
II. The audit procedures selected will achieve specific audit objectives.
Which is/are the main purpose of audit planning?
A. I only
B. II only
C. Both I and II
D. Neither I nor II

4. Evaluate the following statements:

I. This category of procedures is used to obtain an understanding of the entity and its
environment, including its internal control, to assess the risks of material misstatement at
the financial statement ad assertion levels.
II. This category of procedures is used to test the operating effectiveness of controls in
preventing, or detecting and correcting, material misstatements at the assertion level..
Which pertains to risk assessment procedures?
A. I only
B. II only
C. Both I and II
D. Neither I nor II

5. Evaluate the following statements:

I. To assist them in designing and performing further audit procedures.
II. To ascertain whether the audit report will be modified or not.
Which pertains to the primary reason why auditors understand their clients and the environment?
A. I only
B. II only
C. Both I and II
D. Neither I nor II

6. Which is a requirement of PSA 315:

I. Obtaining an understanding of the entity and its environment
II. Discussion among engagement team members about the risk of material misstatement in
the financial statements.
III. Identifying and assessing the risks of material misstatement
A. I only
B. II only
C. Both I and II only
D. I, II, and III

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AT-07
Week 6: FS AUDIT PROCESS – AUDIT PLANNING

7. Which aspects should the auditor’s understanding of the entity and its environment cover?
I. Industry, regulatory and other external factors, including the applicable financial reporting
framework
II. Nature of the entity, including the entity’s selection and application of accounting policies
III. Objectives and strategies and the related business risks that may result in a material
misstatement of the financial statements
A. I only
B. II only
C. Both I and II only
D. I, II, and III

8. Evaluate the following statements:

I. Understand the events and transactions that may have an effect on the client’s financial
statements.
II. Evaluate whether the aggregation of known misstatements causes the financial statements
taken as a whole to be materially misstated.
Which pertains to the primary reason why auditors understand their clients and the environment?
A. I only
B. II only
C. Both I and II
D. Neither I nor II

9. Evaluate the following statements:

I. Acquisitions or disposals of the client’s business activities
II. Products or services and markets of the client’s business.
Which pertains to the operations of an audit client?
A. I only
B. II only
C. Both I and II
D. Neither I nor II

10. A person or firm possessing special skill, knowledge and experience in a particular field excluding
accounting and auditing.
A. Expert. C. Multiskilled personnel
B. Quality control reviewer D. Taxation specialist

11. Evaluate the following statements:

I. Valuations of certain types of assets like land and buildings.
II. Determination of fair values using specialized statistical techniques.
Which task would most likely necessitate for an expert?
A. I only
B. II only
C. Both I and II
D. Neither I nor II

12. In considering materiality for planning purposes, an auditor believes that misstatements
aggregating P10,000 would have a material effect on an entity’s profit and loss, but that
misstatements would have to aggregate P20,000 to materially affect the statement of financial
position. Which is/are true:
I. More procedures are to be performed by the auditor should materiality be set at P20,000
II. Less procedures are to be performed by the auditor should materiality be set at P10,000
A. I only
B. II only
C. Both I and II
D. Neither I nor II

13. Evaluate the following statements:

I. Materiality is always based on turnover.
II. Materiality should only be calculated at the planning stage of the audit.
Which is/are true?
A. I only
B. II only
C. Both I and II
D. Neither I nor II

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AT-07
Week 6: FS AUDIT PROCESS – AUDIT PLANNING

14. The relationship between materiality and audit risk is:

A. Direct. B. Inverse. C. Indeterminable. D. None of these.

15. Which is are true?

I. More evidence is required for a low peso amount than for a high peso amount.
II. The same amount of evidence is required for either low or high peso amounts.
Which is/are true?
A. I only
B. II only
C. Both I and II
D. Neither I nor II

16. Which of the following is correct concerning requirements about auditor communications about
fraud?
I. Fraud that involves senior management should be reported directly to the audit committee
regardless of the amount involved.
II. The auditor has no responsibility to disclose fraud outside the entity under any
circumstances.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

17. Which of the following is correct concerning requirements about auditor communications about
fraud?
I. Company management changes inventory count tags and overstates ending inventory,
while understating cost of goods sold.
II. The treasurer diverts customer payments to his personal due, concealing his actions by
debiting an expense account, thus overstating expenses.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

18. With respect to errors and irregularities, the auditor should plan to
A. Search for errors that would have a material effect and for irregularities that would have either
material or immaterial effect on the financial statements.
B. Search for irregularities that would have a material effect and for errors that would have either
material or immaterial effect on the financial statements.
C. Search for errors or irregularities that would have a material effect on the financial statements.
D. Discover errors or irregularities that have either material or immaterial effect on the financial
statements.

19. When are analytical procedures are required to be performed?

I. As a risk assessment procedure performed during planning
II. As a substantive test procedure during evidence-gathering
III. As an overall review at audit completion.
A. I and II only
B. I and III only
C. II only
D. I, II, and III.

20. The element of the audit planning process most likely to be agreed upon with the client before
implementation of the audit strategy is the determination of the

A. Evidence to be gathered to provide a sufficient basis for the auditor’s opinion.

B. Procedures to be undertaken to discover litigation, claims, and assessments.
C. Pending legal matters to be included in the inquiry of the client’s attorney.
D. Timing of inventory observation procedures to be performed.

21. Which of the following is not typically included in initial audit planning?
A. Client acceptance/continuation decisions.
B. Determination of the purpose of the audit.
C. Obtain an understanding with the client.
D. Perform analytical procedures as substantive tests.

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY AT-07
Week 6: FS AUDIT PROCESS – AUDIT PLANNING

22. Which of the following is least likely considered by the auditor in establishing the overall audit strategy
and developing the audit plan?
A. Understanding of the accounting and internal control systems.
B. Risk and materiality.
C. The involvement of other auditors in the audit of major subsidiaries.
D. The terms of payment pertaining to other auditors and their respective clients.

23. 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 effect of information technology on the audit.
C. The content of the representation letters.
D. The nature and timing of reports and other communication with the entity that are expected
under the engagement.

24. This is a listing of all the things which the auditor will use to gather sufficient appropriate audit evidence:
A. Audit procedures. C. Audit program.
B. Audit plan. D. Audit risk model.

25. In designing audit programs, an auditor should establish specific audit objectives that related primarily
to the
A. Timing of audit procedures C. Selected audit techniques.
B. Cost-benefit of gathering evidence D. Financial statement assertions.

26. The audit program should set out the:

A. Nature of planned procedures C. Extent of planned procedures
B. Timing of planned procedures D. All of the answers.

27. Cost-benefit considerations are part of audit planning. In relation to this, which of the following audit
procedures is usually the least costly to perform?
A. Tests of balances. C. Analytical procedures.
B. Substantive tests of transactions. D. Tests of controls.

28. The audit program usually cannot be finalized until the

A. Consideration of the entity’s internal control has been completed.
B. Engagement letter has been signed by the auditor and the client.
C. Reportable conditions have been communicated to the audit committee.
D. Search for unrecorded liabilities has been performed and documented.

29. The senior auditor responsible for coordinating the field work usually schedules a pre-audit conference
with the audit team primarily to
A. Give guidance to the staff regarding both technical and personnel aspects of the audit.
B. Discuss staff suggestions concerning the establishment and maintenance of time budgets.
C. Establish the need for using the work of specialists and internal auditors.
D. Provide an opportunity to document staff disagreements regarding technical issues.

30. The audit plan generally is modified when

A. Results of tests of control differ from expectations.
B. An engagement letter has been signed by the auditor and the client.
C. A significant deficiency has been communicated to the audit committee of the board of directors.
D. The search for unrecorded liabilities has been expected during the planning of the audit.

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