Auditing Process and Procedures

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Questions and Answers

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 (correct)
To identify misstatements in the financial statements
To test the operating effectiveness of internal controls
To evaluate the overall presentation and disclosure of financial statements

What is the purpose of benchmarking in analytical procedures?

To evaluate the reasonableness of management's estimates
To assess the operating effectiveness of internal controls
To identify unusual transactions and events
To compare the company's financial performance with industry averages (correct)

What is the primary consideration in determining materiality thresholds?

Materiality is solely based on quantitative factors
Professional judgement and industry standards (correct)
Company size and industry
Audit risk and materiality level

What is the purpose of the audit plan?

To identify and assess risks of material misstatement (B) Signup and view all the answers

What is the primary purpose of substantive testing?

To test the reasonableness of audited amounts (D) Signup and view all the answers

What is the purpose of identifying and assessing risks of material misstatement?

To identify and assess risks of material misstatement (A) Signup and view all the answers

What is the purpose of performing ratio analysis in analytical procedures?

To analyze and compare financial ratios (D) Signup and view all the answers

At what stage of the audit process is materiality typically determined?

Planning phase (D) Signup and view all the answers

What is the primary purpose of an engagement letter in an audit?

To outline the terms of the engagement and avoid misunderstandings (D) Signup and view all the answers

What is the responsibility of management in relation to financial statements?

All of the above (D) Signup and view all the answers

Which of the following is NOT a preliminary engagement activity?

Testing of internal controls (B) Signup and view all the answers

What is the purpose of assessing client integrity in the preliminary engagement activities?

To identify potential risks and assess the client's reliability (B) Signup and view all the answers

Which of the following is a component of the audit strategy?

All of the above (D) Signup and view all the answers

What is the framework that guides the audit process?

PFRS / IFRS (A) Signup and view all the answers

What is the primary purpose of directional testing in an audit?

To test the existence and completeness of transactions (D) Signup and view all the answers

What is the main difference between a positive and negative confirmation in an audit?

The type of response required from the customer (D) Signup and view all the answers

Which of the following is a characteristic of a more reliable audit evidence?

Obtained from an independent source outside the entity (A) Signup and view all the answers

What is the main objective of audit sampling?

To apply audit procedures to less than 100% of the items in the population (B) Signup and view all the answers

Which of the following is a type of audit sampling approach?

All of the above (D) Signup and view all the answers

What is the primary risk associated with audit sampling?

The risk that the sample is not representative of the population (A) Signup and view all the answers

What is the main difference between attributes and variables in audit sampling?

Attributes are non-numerical, while variables are numerical (D) Signup and view all the answers

What is the main purpose of audit procedures in the audit strategy?

To obtain sufficient appropriate evidence (B) Signup and view all the answers

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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.