Sample Questions and Answers
What is the primary purpose of audit planning?
a) To reduce the audit fees
b) To ensure the audit is completed quickly
c) To obtain sufficient appropriate audit evidence
d) To assess the internal controls
Answer: c) To obtain sufficient appropriate audit evidence
Which of the following is NOT typically included in an audit plan?
a) Identification of high-risk areas
b) Audit engagement letter
c) Timing of audit procedures
d) Allocation of resources
Answer: b) Audit engagement letter
Analytical procedures are most effective during which phase of the audit?
a) Planning phase
b) Execution phase
c) Completion phase
d) Reporting phase
Answer: a) Planning phase
Which of the following is an example of an analytical procedure?
a) Recalculating depreciation expense
b) Comparing current year sales to prior year sales
c) Inspecting inventory for obsolescence
d) Reviewing minutes of board meetings
Answer: b) Comparing current year sales to prior year sales
Materiality is determined based on:
a) Auditor’s judgment
b) A fixed percentage of revenue
c) Guidelines from the International Auditing Standards
d) The size of the audit client
Answer: a) Auditor’s judgment
In audit planning, the term “scope of the audit” refers to:
a) The fees charged for the audit
b) The timeline of the audit
c) The extent and focus of audit procedures
d) The client’s expectations from the audit
Answer: c) The extent and focus of audit procedures
What is the main objective of analytical procedures during the planning stage?
a) To test internal controls
b) To assess the client’s going concern assumption
c) To identify potential risk areas
d) To verify the accuracy of financial data
Answer: c) To identify potential risk areas
Which of the following increases inherent risk in audit planning?
a) A new client in a stable industry
b) Operations in multiple countries with different regulations
c) A strong internal audit function
d) Frequent external audits
Answer: b) Operations in multiple countries with different regulations
Which document outlines the auditor’s responsibilities and scope of work?
a) Audit report
b) Audit engagement letter
c) Internal control questionnaire
d) Management representation letter
Answer: b) Audit engagement letter
The audit risk model is composed of which three elements?
a) Control risk, materiality, and detection risk
b) Inherent risk, control risk, and detection risk
c) Business risk, inherent risk, and control risk
d) Fraud risk, control risk, and materiality
Answer: b) Inherent risk, control risk, and detection risk
The acceptable level of detection risk is inversely related to:
a) Audit risk
b) Control risk
c) Materiality
d) Inherent risk
Answer: a) Audit risk
Which of the following is NOT an analytical procedure?
a) Trend analysis
b) Ratio analysis
c) Variance analysis
d) Vouching individual transactions
Answer: d) Vouching individual transactions
The preliminary judgment about materiality is set:
a) After assessing control risk
b) Before beginning substantive procedures
c) During the audit completion phase
d) After obtaining the client’s trial balance
Answer: b) Before beginning substantive procedures
When conducting analytical procedures, what is a benchmark used to identify anomalies?
a) Management representation letter
b) Prior period financial data
c) Auditor’s opinion
d) Financial statement assertions
Answer: b) Prior period financial data
Audit planning must consider which of the following factors?
a) The scope of prior year’s audit
b) The client’s industry and business environment
c) The size of the audit firm
d) Management’s financial goals
Answer: b) The client’s industry and business environment
Which of the following is an example of inherent risk?
a) Lack of segregation of duties
b) Complex revenue recognition policies
c) Unsecured access to accounting software
d) Non-compliance with debt covenants
Answer: b) Complex revenue recognition policies
What is the primary purpose of the risk assessment process in audit planning?
a) To improve the client’s financial performance
b) To design audit procedures that minimize audit risk
c) To establish materiality thresholds
d) To determine the auditor’s independence
Answer: b) To design audit procedures that minimize audit risk
What type of risk remains after implementing controls?
a) Inherent risk
b) Residual risk
c) Control risk
d) Audit risk
Answer: b) Residual risk
Which ratio is most useful for evaluating a company’s liquidity?
a) Return on assets
b) Debt-to-equity ratio
c) Current ratio
d) Gross profit margin
Answer: c) Current ratio
A significant risk is:
a) A risk that requires a special audit report
b) A risk identified by management as significant
c) A risk that requires special audit consideration
d) A risk related to minor financial misstatements
Answer: c) A risk that requires special audit consideration
What is “performance materiality”?
a) The materiality level set by regulatory bodies
b) The threshold for individual misstatements to be addressed
c) The materiality amount used to assess financial statement risks
d) A lower materiality level to reduce the risk of undetected misstatements
Answer: d) A lower materiality level to reduce the risk of undetected misstatements
The auditor’s evaluation of material misstatements includes:
a) Only known misstatements
b) Only management estimates
c) Both known and likely misstatements
d) Misstatements identified by the client’s staff
Answer: c) Both known and likely misstatements
Which of the following is a key component of audit planning?
a) Issuing the audit opinion
b) Conducting substantive testing
c) Establishing the audit timeline
d) Performing walk-throughs of key processes
Answer: c) Establishing the audit timeline
Which analytical procedure would best identify a potential overstatement of revenue?
a) Comparing the gross margin percentage to prior years
b) Analyzing inventory turnover ratios
c) Reviewing the accounts payable ledger
d) Inspecting fixed asset additions
Answer: a) Comparing the gross margin percentage to prior years
Risk of material misstatement is composed of:
a) Control risk and detection risk
b) Control risk and inherent risk
c) Inherent risk and audit risk
d) Detection risk and audit risk
Answer: b) Control risk and inherent risk
Which of the following factors may increase detection risk?
a) Ineffective audit procedures
b) Strong internal controls
c) High inherent risk
d) Effective risk assessments
Answer: a) Ineffective audit procedures
Auditors perform analytical procedures primarily to:
a) Detect fraud
b) Confirm client balances
c) Identify unusual trends or relationships
d) Evaluate the client’s business strategies
Answer: c) Identify unusual trends or relationships
How do auditors use internal controls in audit planning?
a) To determine the fees charged
b) To establish the audit opinion
c) To assess the level of control risk
d) To design the financial statements
Answer: c) To assess the level of control risk
What is the relationship between control risk and substantive procedures?
a) Directly proportional
b) Inversely proportional
c) No relationship
d) Control risk eliminates the need for substantive procedures
Answer: a) Directly proportional
Which of the following is NOT an inherent risk factor?
a) Complex accounting policies
b) Significant estimates
c) Lack of segregation of duties
d) Rapid changes in the industry
Answer: c) Lack of segregation of duties
Which of the following is typically NOT a consideration in audit planning?
a) Deadlines for reporting
b) Scope of the client’s internal audit function
c) Availability of evidence
d) Personal opinion of the auditor about the client
Answer: d) Personal opinion of the auditor about the client
Which of the following is a limitation of analytical procedures?
a) They are only applicable during the planning phase
b) They rely heavily on management estimates
c) They cannot detect immaterial misstatements
d) They are time-consuming and resource-intensive
Answer: b) They rely heavily on management estimates
In audit planning, what does “understanding the entity” include?
a) Determining the audit opinion
b) Analyzing the client’s tax position
c) Understanding the client’s business environment and operations
d) Reviewing the client’s financial statements
Answer: c) Understanding the client’s business environment and operations
An auditor uses the audit risk model to:
a) Increase control risk
b) Determine the nature, timing, and extent of audit procedures
c) Reduce inherent risk to zero
d) Eliminate detection risk
Answer: b) Determine the nature, timing, and extent of audit procedures
Which of the following is a qualitative factor that affects materiality?
a) The client’s net income
b) Misstatements that change a trend in earnings
c) Total assets of the client
d) Auditor’s fees
Answer: b) Misstatements that change a trend in earnings
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