CEBU INSTITUTE OF TECHNOLOGY UNIVERSITY

COLLEGE OF MANAGEMENT, BUSINESS & ACCOUNTANCY

ARC 412 AUDITING THEORY REVIEW
RISK ASSESSMENT & AUDIT PLANNING
JONAS B. ABELLAR, CPA, MBA
NAME: _____________________________________________________________ SCORE: _________________
MULTIPLE CHOICE QUESTIONS ENCIRCLE THE LETTER OF YOUR ANSWER.
1. The development of a general strategy and a detailed approach for the expected nature, timing, and extent of audit
refers to :
a. Supervision
b. Audit procedures
c. Directing
d. Planning
2. Which of the following would a successor auditor normally perform after acceptance of an audit client?
a. Inquiry of predecessor auditor regarding the client.
b. Review the SEC filings of the client.
c. Inquiry of bankers regarding the client.
d. Review of predecessor auditor working papers.
3. Which of the following is required documentation in an audit in accordance with generally accepted auditing
standards?
a. A flowchart or narrative of the information system describing the recording and classification of transactions for
financial reporting.
b. An audit program setting forth in detail the procedures necessary to accomplish the engagements 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 policies and procedures that assure specific objectives will be
achieved.
4. Analytical procedures used in planning an audit should focus on
a. Reducing the scope of tests of controls and substantive tests.
b. Providing assurance that potential material misstatements will be identified.
c. Enhancing the auditors understanding of the clients business.
d. Assessing the adequacy of the available evidential matter.
5. Which of the following statements is correct concerning analytical procedures?
a. Analytical procedures usually involve comparisons of ratios developed from recorded amounts to assertions
developed by management.
b. Analytical procedures used in planning an audit generally use data aggregated at a high level.
c. Analytical procedures can replace tests of controls in gathering evidence to support the assessed level of control
risk.
d. Analytical procedures are more efficient, but not more effective, than tests of details and transactions.
6. Which of the following is an aspect of scheduling and controlling the audit engagement?
a. Including in the audit program a column for estimated and actual time.
b. Performing audit work only after the clients books of account have been closed for the period under examination.
c. Writing a conclusion in individual working papers indicating how the results of the audit will affect the auditors
report.
d. Including in the engagement letter an estimate of the minimum and maximum audit fee.
7. Which of the following statements is not correct about materiality?
a. The concept of materiality recognizes that some matters are important for fair presentation of financial statements
in conformity with GAAP, while other matters are not important.
b. An auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements
that could be material to any one of the financial statements.
c. Materiality judgments are made in light of surrounding circumstances and necessarily involve both quantitative
and qualitative judgments.
d. An auditors consideration of materiality is influenced by the auditors perception of the needs of a reasonable
person who will rely on the financial statements.
8. Incremental risk is the increased risk that errors may not be detected at the balance sheet date because:
a. Audit procedures were performed at an interim date
b. Inherent risk was assessed too low.
c. Analytical procedures were not performed.
d. Detection risk was set too high a level.
9. The extent of planning will vary according to any of the following, except:
a. Size of the audit client.
b. Auditors experience with the entity and knowledge of the business.
c. The nature and complexity of the audit engagement
d. The assessed level of control risk.

10 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 information technology used by the client.
c. The content of the representation letters.
d. The nature and timing of reports or other communication with the entity that are expected under the engagement.
11. Which of the following least likely affect the form and content of the overall audit plan?
a.
b.
c.
d.

Complexity of the audit engagement.

Methodology and technology used by the auditor.
The entitys form of business organization.
The size of the entity.

12. Which of the following will most likely help the auditor to identify and understand the events, transactions and
practices of his audit client?
a. Obtaining a sufficient knowledge of the business of his client.
b. Understanding of accounting and internal control.
c. Testing control policies and procedures.
d. Obtaining a representation letter from the client management.
13. The auditor is not expected to have
a. A particular knowledge of the economy and the industry within which the entity operates.
b. A particular knowledge of how the entity operates.
c. A level of knowledge of business ordinarily less than that possessed by management.
d. A knowledge of business which is used in assessing inherent and control risk.
14. Understanding the business and using this information appropriately assists the auditor in, except
a. Deciding whether to do tests of controls.
b. Evaluating audit evidence.
c. Assessing risks and identifying potential problems.
d. Planning and performing the audit effectively and efficiently.
15. A knowledge of the business is a frame of reference within which the auditor exercises professional judgment. This
assists the auditor in carrying out the following objectives, except:
a. Assessing risks and identifying problems.
b. Evaluating audit evidence.
c. Determining the audit opinion to be expressed.
d. Planning and performing the audit effectively and efficiently.
16. Which of the following factors is inappropriately relevant to the managements assessment of the going concern
assumption?
a. The degree of uncertainty associated with the outcome of an event or condition decreases significantly the further
into the future of judgment being made about the outcome of an event or condition.
b. Any judgment about the future is based on information available at the time at which the judgment is made.
c. The size and complexity of the entity, and the nature and conditions of its business affect the judgment regarding
the outcome of events or conditions.
d. Subsequent events can contradict a judgment which was reasonable at the time it was made.
17. When events or conditions have been identified which may cast significant doubt on the entitys ability to continue as
a going concern, the auditor should:
a. Review managements plans for future actions based on its going concern assessment.
b. Gather sufficient appropriate audit evidence to confirm or dispel whether or not a material uncertainty exists
through carrying out procedures considered necessary, including considering the effect of any plans of
management and other mitigating factors.
c. Seek written representations from management regarding its plans for future action.
d. All of the above.
18. The following are related to the auditors responsibility to assess the ability of the company to continue as a going
concern?
I. The auditor should consider the appropriateness of the managements use of the going concern assumption in
the preparation of the financial statements.
II. The auditor is to consider whether there are material uncertainties about the entitys ability to continue as a going
concern that needs to be disclosed in the financial statements.
III. The absence of any reference to going concern uncertainty in the auditors report is viewed as a guarantee as to
the entitys ability to continue as a going concern.
Which of the foregoing inappropriately describe(s) the auditors responsibility?
a. I only
b. I and II only
c. II only
d. III only

19. If adequate disclosure is not made by the entity regarding substantial doubt about its ability to continue as a going
concern, the auditor should include in his report specific reference to the substantial doubt as to ability of the
company to continue as a going concern and should express:
a. Unqualified opinion with explanatory paragraph
b. A subject to qualified opinion or adverse opinion.
c. Either an except for qualified opinion or an adverse opinion.
d. A disclaimer of opinion.
20. If the auditor believes that the entity will not be able to continue as a going concern and the financial statements are
prepared on a going concern basis, the auditors report should include:
a. Unqualified opinion with explanatory paragraph. c. Adverse opinion.
b. Qualified opinion.
d. Disclaimer of opinion.
21. If the auditor believes that management should extend its assessment but the latter refuses to do so, the auditor
should:
a. Rectify the lack of analysis by management.
b. Extend his audit procedures to obtain sufficiently appropriate evidence regarding the use of the going concern
assumption.
c. Emphasize this matter in the audit report.
d. Consider a modification of the report as a result of the limitation in the scope of the auditors work.
22. The management denied the auditors request that the management has to extend its assessment of its going
concern ability. However, the auditors other procedures are sufficient to assess the appropriateness of
management use of the going concern assumption in the preparation of the financial statements. he auditor
should issue:
a. Unqualified opinion
c. Adverse opinion
b. Unqualified opinion with explanatory paragraph
d. Disclaimer of opinion

23. Which of the following is correct statement?

a. The auditor should use professional judgment to assess audit risk and to design audit procedures to
ensure it is eliminated.
b. The auditor is an insurer, and his or her report constitutes a guarantee.
c. The subsequent discovery that a material misstatement exists in the financial statements is evidence of
inadequate planning, performance, or judgment on the part of the auditor.
d. The auditor should obtain an understanding of the accounting and internal control systems sufficient to
plan the audit and develop an effective audit approach.
24. Inherent risk and control risk differ from detection risk in that they
a. Arise from the misapplication of auditing procedures.
b. May be assessed in either quantitative or nonquantitative terms.
c. Exist independently of the financial statement audit.
d. Can be changed at the auditors discretion.
25. Which of the following is an incorrect statement?
a. Detection risk is a function of the effectiveness of an auditing procedure and its application.
b. Detection risk arises partly from uncertainties that exists when the auditor does not examine 100
percent of the population.
c. Detection risk arises partly because of other uncertainties that exist even if the auditor were to examine
100 percent of the population.
d. Detection risk exists independently of the audit of the financial statements.
26. Why would the auditor assess control risk?
a. Because it indicates where inherent risk may be the greatest.
b. Because it determines whether sampling risk is sufficiently low.
c. Because it affects the level of detection risk the auditor may accept.
d. Because it includes the aspects of nonsampling risk that are controllable.
27. The audit risk model consists of: AR = IR x CR x DR
The detection risk is the dependent variable. What is the acceptable level of detection risk if the assessed
level of Inherent risk is High and the Control risk is Low?
a. Highest

b. Medium

c. Lower

d. Higher

28. As the acceptable level of detection risk decreases, the assurance directly provided from
a. Substantive tests should increase.
c. Substantive tests should decrease.
b. Tests of controls should increase.
d. Tests of controls should decrease.

29. When the auditor determines that detection risk regarding a financial statement assertion for a material
account balance or class of transactions cannot be reduced to an acceptable level, the auditor should
express
a. Qualified or adverse opinion
c. Unqualified opinion with explanatory paragraph
b. Qualified or disclaimer of opinion
d. Unqualified opinion.
30. Which of the following factors is not a good indicator of potential financial failure?
a. Client is constantly short of cash and working capital.
b. Clients retained earnings were reduced by half as a result of a large dividend payout.
c. Client relies heavily on debt financing, especially by financing permanent assets with
short-term loans.
d. Client has had increasing net losses for several years.
31. Which of the following is incorrect regarding PSA 315?
a. The purpose of this PSA is to establish standards and to provide guidance on obtaining an
understanding of the entity and its environment, including its internal control, and on assessing the risks
of material misstatement in a financial statement audit.
b. This PSA requires the auditor to make risk assessments at the financial statement and assertion levels
based on an appropriate understanding of the entity and its environment, including its internal control.
c. The requirements and guidance of this PSA are to be applied in conjunction with the requirements and
guidance provided in other PSAs.
d. This PSA discusses the auditors responsibility to determine overall responses and to design and
perform further audit procedures whose nature, timing, and extent are responsive to the risk
assessments.
32. The main purpose of risk assessment procedures is to
a. Obtain an understanding of the entity and its environment, including its internal control, to assess the
risks of material misstatement at the financial statement and assertion levels.
b. Test the operating effectiveness of controls in preventing, or detecting and correcting, material
misstatements at the assertion level.
c. Detect material misstatements at the assertion level.
d. All of the above.
33. Inquiries directed towards those charged with governance may most likely
a. Relate to their activities concerning the design and effectiveness of the entitys internal control and
whether management has satisfactorily responded to any findings from these activities.
b. Help the auditor understand the environment in which the financial statements are prepared.
c. Relate to changes in the entitys marketing strategies, sales trends, or contractual arrangements with its
customers.
d. Help the auditor in evaluating the appropriateness of the selection and application of certain accounting
policies.
34. Which statement is incorrect regarding the discussion among the engagement team about the susceptibility
of the entitys financial statements to material misstatements?
a. The members of the engagement team should discuss the susceptibility of the entitys financial
statements to material misstatements.
b. The objective of this discussion is for members of the engagement team to gain a better understanding
of the potential for material misstatements of the financial statements resulting from fraud or error in the
specific areas assigned to them, and to understand how the results of the audit procedures that they
perform may affect other aspects of the audit.
c. The discussion provides an opportunity for more experienced engagement team members, including
the engagement partner, to share their insights based on their knowledge of the entity, and for the team
members to exchange information about the business risks.
d. All the team members should have a comprehensive knowledge of all aspects of the audit.
35. Nature of an entity refers to
a. The entitys operations, its ownership and governance, the types of investments that it is making and
plans to make, the way that the entity is structured and how it is financed.
b. The overall plans for the entity.
c. The operational approaches by which management intends to achieve its objectives.
d. The result of significant conditions, events, circumstances, actions or inactions that could adversely
affect the entitys ability to achieve its objectives and execute its strategies, or the setting of
inappropriate objectives and strategies.
36. A potential business risk created by industry developments may most likely include
a. Increased product liability.
b. increased legal exposure
c. The entity does not have the personnel or expertise to deal with the changes in the industry.
d. Loss of financing due to the entitys inability to meet financing requirements.

37. Which of the following conditions and events may most likely indicate the existence of risks of material
misstatement?
a. Having personnel with appropriate accounting and financial reporting skills.
b. Accounting measurements that involve simple processes.
c. Significant amount of routine or systematic transactions.
d. Constraints on the availability of capital and credit.
38. Examples of situations where the auditor may find it impossible to design effective substantive procedures
that by themselves provide sufficient appropriate audit evidence that certain assertions are not materially
misstated include the following:
i. An entity that conducts its business using IT to initiate orders for the purchase and delivery of goods
based on predetermined rules of what to order and in what quantities and to pay the related accounts
payable based on system-generated decisions initiated upon the confirmed receipt of goods and terms
of payment. No other documentation of orders placed or goods received is produced or maintained,
other than through the IT system.
ii. An entity that provides services to customers via electronic media (for example, an Internet service
provider or a telecommunications company) and uses IT to create a log of the services provided to its
customers, initiate and process its billings for the services and automatically record such amounts in
electronic accounting records that are part of the system used to produce the entitys financial
statements.
a. I and II
b. I only
c. II only
d. Neither I nor II
39. The auditor should determine overall responses to address the risks of material misstatement at the
financial statement level. Such responses least likely include
a. Emphasizing to the audit team the need to maintain professional skepticism in gathering and evaluating
audit evidence.
b. Assigning more experienced staff or those with special skills or using experts.
c. Incorporating additional elements of unpredictability in the selection of further audit procedures to be
performed.
d. Performing substantive procedures at an interim date instead of at period end.
40. The auditor should design and perform further audit procedures whose nature, timing, and extent are
responsive to the assessed risks of material misstatement at the assertion level. Which of the following is
the most important consideration in responding to the assessed risks?
a. The nature of the audit procedures.
c. The timing of the audit procedures.
b. The extent of the audit procedures.
d. All of these are equally important.
41. Which statement is incorrect regarding the nature of further audit procedures?
a. The nature of further audit procedures refers to their purpose and their type.
b. Certain audit procedures may be more appropriate for some assertions than others.
c. The higher the auditors assessment of risk, the less reliable and relevant is the audit evidence sought
by the auditor from substantive procedures.
d. The auditor is required to obtain audit evidence about the accuracy and completeness of information
produced by the entitys information system when that information is used in performing audit
procedures.
42. Which statement is incorrect regarding the extent of further audit procedures?
a. Extent includes the quantity of a specific audit procedure to be performed.
b. The extent of an audit procedure is determined by the judgment of the auditor after considering the
materiality, the assessed risk, and the degree of assurance the auditor plans to obtain.
c. The auditor ordinarily decreases the extent of audit procedures as the risk of material misstatement
increases.
d. Increasing the extent of an audit procedure is effective only if the audit procedure itself is relevant to the
specific risk.
43. Which statement is incorrect regarding tests of controls?
a. Tests of controls are required under certain circumstances.
b. Tests of controls are required when an entity conducts its business using IT and no documentation of
transactions is produced or maintained, other than through the IT system.
c. Tests of the operating effectiveness of controls are performed only on those controls that the auditor
has determined are suitably designed to prevent, or detect and correct, a material misstatement in an
assertion.
d. Testing the operating effectiveness of controls is the same as obtaining audit evidence that controls
have been implemented.

44. Which statement is incorrect regarding the nature of tests of controls?

a. As the planned level of assurance increases, the auditor seeks more reliable audit evidence.
b. Those controls subject to testing by performing inquiry combined with inspection or reperformance
ordinarily provide more assurance than those controls for which the audit evidence consists solely of
inquiry and observation.
c. The absence of misstatements detected by a substantive procedure provides audit evidence that
controls related to the assertion being tested are effective.
d. A material misstatement detected by the auditors procedures that was not identified by the entity
ordinarily is indicative of the existence of a material weakness in internal control.
45. Which statement is incorrect regarding the timing of tests of controls?
a. Audit evidence pertaining only to a point in time may be sufficient for the auditors purpose, for
example, when testing controls over the entitys physical inventory counting at the period end.
b. If the auditor plans to rely on controls that have changed since they were last tested, the auditor should
test the operating effectiveness of such controls in the current audit.
c. If the auditor plans to rely on controls that have not changed since they were last tested, the auditor
should test the operating effectiveness of such controls at least once in every second audit.
d. When there are a number of controls for which the auditor determines that it is appropriate to use audit
evidence obtained in prior audits, the auditor should test the operating effectiveness of some controls
each audit.
46. Which statement is incorrect regarding the extent of tests of controls?
a. The auditor designs tests of controls to obtain sufficient appropriate audit evidence that the controls
operated effectively throughout the period of reliance.
b. The more the auditor relies on the operating effectiveness of controls in the assessment of risk, the
lesser is the extent of the auditors tests of controls.
c. If the rate of expected deviation is expected to be too high, the auditor may determine that tests of
controls for a particular assertion may not be effective.
d. Because of the inherent consistency of IT processing, the auditor may not need to increase the extent
of testing of an automated control.
47. Which statement is incorrect regarding substantive procedures?
a. Substantive procedures are performed in order to detect material misstatements at the assertion level,
and include tests of details of classes of transactions, account balances, and disclosures and
substantive analytical procedures.
b. The auditor always performs substantive procedures for each class of transactions, account balance,
and disclosure.
c. When the auditor has determined that an assessed risk of material misstatement at the assertion level
is a significant risk, the auditor should perform substantive procedures that are specifically responsive
to that risk.
d. In order to obtain sufficient appropriate audit evidence, the substantive procedures related to significant
risks are most often designed to obtain audit evidence with high reliability.
48. The auditors substantive procedures should include the following audit procedures related to the financial
statement closing process:
i. Agreeing the financial statements to the underlying accounting records.
ii. Examining material journal entries and other adjustments made during the course of preparing the
financial statements.
a. I and II
b. I only
c. II only
d. Neither I nor II
49. Which statement is incorrect regarding the nature, timing and extent of substantive procedures?
a. Substantive analytical procedures are generally more applicable to large volumes of transactions that
tend to be predictable over time.
b. Tests of details are ordinarily more appropriate to obtain audit evidence regarding certain assertions
about account balances, including existence and valuation.
c. Substantive procedures cannot be performed at an interim date.
d. The greater the risk of material misstatement, the greater the extent of substantive procedures.
50. Which statement is incorrect regarding evaluation of the sufficiency and appropriateness of audit evidence
obtained?
a. Based on the audit procedures performed and the audit evidence obtained, the auditor should evaluate
whether the assessments of the risks of material misstatement at the assertion level remain
appropriate.
b. As the auditor performs planned audit procedures, the audit evidence obtained may cause the auditor
to modify the nature, timing, or extent of other planned audit procedures.
c. In developing an opinion, the auditor considers only the audit evidence which corroborate the
assertions in the financial statements.
d. If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor should express a
qualified opinion or a disclaimer of opinion.
END OF QUIZ