ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 45  May 2023 CPA Licensure Examination AT- 07

AUDITING (Auditing Theory) J. IRENEO  E. ARAÑAS  F. TUGAS  C. ALLAUIGAN

FS AUDIT PROCESS – AUDIT PLANNING

Reference: PSA 300 – Planning an audit of financial statements, PSA 320 – Materiality in planning and performing
the audit, PSA 315 Identifying and assessing the risks of material misstatement.
Planning Activities
The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that
guides the development of the audit plan.
Audit Strategy: The auditor should establish an overall audit strategy, including preliminary assessment of
materiality. The audit strategy outlines the scope of the audit engagement, the reporting objectives, timing of the
audit, required communications, and the factors that in the auditor’s professional judgment are significant in
directing the engagement team effort. (General approach)

Audit Plan: The auditor is required to develop a written audit plan that outlines the nature, extent and timing of the
procedures to be performed during audit, including. (Specific details)
a. Risk assessment procedures
b. Further audit procedures at the assertion level (tests of controls and substantive procedures)
c. Other planned audit procedures to comply with PSA

The audit plan shall also include the direction and supervision of engagement team members and the review of
their work.

The audit strategy and audit plan can be modified as the audit progresses in response to new information or the
results of other procedures.
Audit planning documentation
A. Audit Strategy
B. Audit Plan
C. Any significant changes to the audit strategy and audit plan and the reason for the change

Materiality
In planning the audit, the auditor makes judgments about the size of misstatements that will be considered material.
Performance materiality means the amount or amounts set by the auditor at less than materiality for the financial
statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected
and undetected misstatements exceeds materiality for the financial statements as a whole. If applicable,
performance materiality also refers to the amount or amounts set by the auditor at less than the materiality level
or levels for particular classes of transactions, account balances or disclosures.
Required documentation:
A. Materiality for the financial statements as a whole
B. If applicable, the materiality level or levels for particular classes of transactions, account balances or
disclosures
C. Performance materiality and
D. Any revision of Materiality and Performance materiality as the audit progressed

Risk assessment activities

The objective of the auditor is to identify and assess the risks of material misstatement, whether due to fraud or
error, at the financial statement and assertion levels.
To enable the auditor to identify and assess the risk of material misstatement, the auditor should obtain an
understanding of the following
A. Entity and its environment
B. Applicable financial reporting framework
C. Entity’s system of internal control

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
FS AUDIT PROCESS – AUDIT PLANNING AT-07
Assertions – Representations, explicit or otherwise, with respect to the recognition, measurement, presentation
and disclosure of information in the financial statements which are inherent in management representing that the
financial statements are prepared in accordance with the applicable financial reporting framework. Assertions are
used by the auditor to consider the different types of potential misstatements that may occur when identifying,
assessing and responding to the risks of material misstatement.
Significant risk – An identified risk of material misstatement:
(i) For which the assessment of inherent risk is close to the upper end of the spectrum of inherent risk due to the
degree to which inherent risk factors affect the combination of the likelihood of a misstatement occurring and the
magnitude of the potential misstatement should that misstatement occur; or
(ii) That is to be treated as a significant risk in accordance with the requirements of other PSAs.
The auditor must perform the following procedures to assess and respond to the risk of material misstatement:
A. Obtain an understanding of the entity and its environment, applicable financial reporting framework and
its system of internal control.
B. Identify and assess the risk of material misstatement (note: assess both inherent and control risk
separately).
C. Respond to the assessed level of risk by performing further audit procedures (tests of controls and
substantive tests).
D. Evaluate audit evidence.
Audit risk is the risk that the auditor may unknowingly fail to modify appropriately the opinion on materially
misstated financial statements. The auditor should plan the audit so that the overall audit risk is limited to a low
level.
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 c. Both I and II
B. II only 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 c. Both I and II
B. II only d. Neither I nor II

4. Evaluate the following statements:

I. The auditor shall design and perform risk assessment procedures in a manner that is not biased towards
obtaining audit evidence that may be corroborative or towards excluding audit evidence that may be
contradictory.
II. When the auditor intends to use information obtained from the auditor’s previous experience with the
entity and from audit procedures performed in previous audits, the auditor shall evaluate whether such
information remains relevant and reliable as audit evidence for the current audit.

Which of the following statements is/are true in relation to risk assessment procedures?
A. I only c. Both I and II
B. II only d. Neither I nor II

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
FS AUDIT PROCESS – AUDIT PLANNING AT-07
5. Evaluate the following statements:
I. Inquiries of management and of other appropriate individuals within the entity, including individuals
within the internal audit function (if the function exists).
II. Observation and inspection.
Which pertains to the risk assessment procedures?
A. I only c. Both I and II
B. II only d. Neither I nor II
6. Which of the following procedures would an Auditor least likely perform during the planning stage of the audit?
A. Determine the timing of testing
B. Take a tour of the client’s facilities
C. Perform inquiries of outside legal counsel regarding pending litigation
D. Determine the effect of information technology on the audit
7. Which of the following is required documentation in an audit in accordance with PSA?
A. A flowchart or narrative of the information system relevant to financial reporting describing the recording
and classification of transaction for financial reporting
B. An audit plan setting forth in detail the procedures necessary to accomplish the engagement’s objectives
C. A planning memorandum establishing the timing of the audit procedures and coordinating the assistance
of entity personnel
D. An internal control questionnaire identifying controls that assure specific objectives will be achieved
8. Which is a requirement of PSA 315:
I. Obtaining an understanding of the entity and its environment, and the Applicable Financial Reporting
Framework.
II. Understanding the Components of the Entity’s System of Internal Control
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
9. Which aspects should the auditor’s understanding of the entity and its environment cover?
I. The entity’s organizational structure, ownership and governance, and its business model, including the
extent to which the business model integrates the use of IT.
II. Industry, regulatory and other external factors.
III. The measures used, internally and externally, to assess the entity’s financial performance.
A. I only
B. II only
C. Both I and II only
D. I, II, and III
10. Evaluate the following statements:
I. Assist the auditor with understanding the entity’s ability to provide appropriate oversight of its system
of internal control.
II. Provide evidence of deficiencies, which may indicate an increase in the susceptibility of the entity’s
financial statements to risks of material misstatement.
Which pertains to the reason why auditors understand their client’s governance?
A. I only c. Both I and II
B. II only d. Neither I nor II

11. Evaluate the following statements:

I. Understanding the entity’s objectives, strategy and business model helps the auditor to understand the
entity at a strategic level, and to understand the business risks the entity takes and faces.
II. Assists the auditor in identifying risks of material misstatement, since most business risks will eventually
have financial consequences and, therefore, an effect on the financial statements.
Which pertains to the reason why auditor obtains understanding of the client’s business model?
A. I only c. Both I and II
B. II only d. Neither I nor II

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
FS AUDIT PROCESS – AUDIT PLANNING AT-07
12. 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
13. 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
14. 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 c. Both I and II
B. II only d. Neither I nor II
15. 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
16. The relationship between materiality and audit risk is:
A. Direct. B. Inverse. C. Indeterminable. D. None of these.
17. 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
18. 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 c. Both I and II
B. II only d. Neither I nor II

19. 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 c. Both I and II
B. II only d. Neither I nor II

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ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
FS AUDIT PROCESS – AUDIT PLANNING AT-07
20. 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.
21. Analytical procedures used in planning an audit should help the auditor in:
A. Reducing the scope of tests of controls and substantive tests
B. Providing assurance that potential material misstatements will be identified
C. Identify inconsistencies, unusual transactions or events, and amounts, ratios, and trends that indicate
matters that may have audit implications.
D. Assessing the adequacy of the available audit evidence
22. 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.
23. 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.
24. 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.
25. 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.

26. 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.

27. 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.

28. 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.

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

29. 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.

30. 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.

31. 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.

32. 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.

33. 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.

34. Which one of the following is a true statement about the required risk assessment discussion?
A. The discussion about the susceptibility of the entity’s financial statements to material misstatement must
be held separately from the discussion about the susceptibility of the entity’s financial statements to fraud.
B. The discussion should involve all members who participate on the audit team, including the engagement
partner
C. The discussion should include consideration of the risk of management override of controls
D. The risk assessment discussion should occur during the overall review stage of the audit

35. Which of the following documentation is not required for an audit in accordance with PSA?
A. A written audit plan setting forth the procedures necessary to accomplish the audit objectives
B. The basis for the auditor’s decision to perform tests of controls concurrently with obtaining an
understanding of internal control
C. The auditor’s understanding of the entity’s control activities that help ensure achievement of management
objectives
D. The assessment of the risks of material misstatement at both the financial statements and relevant
assertion levels

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