22 Questions
What is the primary objective of performing analytical procedures during the planning phase of an audit?
To understand the business and identify areas that may represent specific risks
What is the purpose of benchmarking in analytical procedures?
To compare the company's financial performance with industry averages
What is the primary consideration in determining materiality thresholds?
Professional judgement and industry standards
What is the purpose of the audit plan?
To identify and assess risks of material misstatement
What is the primary purpose of substantive testing?
To test the reasonableness of audited amounts
What is the purpose of identifying and assessing risks of material misstatement?
To identify and assess risks of material misstatement
What is the purpose of performing ratio analysis in analytical procedures?
To analyze and compare financial ratios
At what stage of the audit process is materiality typically determined?
Planning phase
What is the primary purpose of an engagement letter in an audit?
To outline the terms of the engagement and avoid misunderstandings
What is the responsibility of management in relation to financial statements?
All of the above
Which of the following is NOT a preliminary engagement activity?
Testing of internal controls
What is the purpose of assessing client integrity in the preliminary engagement activities?
To identify potential risks and assess the client's reliability
Which of the following is a component of the audit strategy?
All of the above
What is the framework that guides the audit process?
PFRS / IFRS
What is the primary purpose of directional testing in an audit?
To test the existence and completeness of transactions
What is the main difference between a positive and negative confirmation in an audit?
The type of response required from the customer
Which of the following is a characteristic of a more reliable audit evidence?
Obtained from an independent source outside the entity
What is the main objective of audit sampling?
To apply audit procedures to less than 100% of the items in the population
Which of the following is a type of audit sampling approach?
All of the above
What is the primary risk associated with audit sampling?
The risk that the sample is not representative of the population
What is the main difference between attributes and variables in audit sampling?
Attributes are non-numerical, while variables are numerical
What is the main purpose of audit procedures in the audit strategy?
To obtain sufficient appropriate evidence
Study Notes
Audit Planning
- Audit planning involves understanding internal controls, testing internal controls, substantive testing, and completing the audit.
- Preliminary engagement activities include:
- Acceptance and continuance of client relationships, assessing client integrity, and reasons for change.
- Evaluating compliance with ethical requirements, including independence.
- Establishing an understanding of the terms of the engagement.
Engagement Letter
- An engagement letter outlines the terms of the engagement between the audit team and the client.
- Purpose: to avoid misunderstandings.
- Content:
- Objective and scope: auditor expresses an opinion on the financial statements.
- Responsibilities: management is responsible for preparation of financial statements, implementation of internal control, adjusting financial statements to correct misstatements, and compliance with laws and regulations.
- Framework: PFRS/IFRS.
- Other requirements: e.g., BIR, SEC, BSP, CAAP.
- Fees.
Generalizations
- More reliable if:
- Obtained from an independent source outside the entity.
- Internal controls are effective.
- Obtained directly by the auditor.
- In documentary form (written) rather than obtained orally.
- Original documents rather than photocopies.
Directional Testing
- Tracing: testing completeness assertion, source documents, accounting records, and liabilities understatement.
- Vouching: testing existence assertion, accounting records, source documents, and assets overstatement.
Audit Sampling
- Applying audit procedures to less than 100% of the items in the population.
- Types: statistical and non-statistical approaches.
- Attributes: rate of deviation or occurrence, internal control.
- Variables: numerical quantity, substantive testing.
Sampling Risk
- Risk that the result from the sample is not equal to the population.
- Types: risk of incorrect acceptance, risk of incorrect rejection.
Analytical Procedures
- Analyzing using numbers/amounts.
- Types:
- Ratio analysis: GPM, NPM, Asset TO, ROA.
- Trend analysis: revenue.
- Regression analysis: revenue.
- Variance analysis: 2019, 2020, 2021, 2022.
- Benchmarking: comparison between competitors.
Materiality
- Guidelines and professional judgment.
- Materiality thresholds are often computed using:
- 0.5% to 1% of assets.
- 1% to 3% of revenues.
- 5% to 10% of net income.
- Materiality levels: 1.
This quiz covers the various stages of the auditing process, including planning, testing, and completing the audit. It also touches on preliminary engagement activities, such as acceptance and continuance of client relationships, ethical requirements, and establishing an understanding of the terms of the engagement.
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