Chapter 2. Planning Activities

Question 1

Analytical procedure

Answer 1

AICPA Professional Standards state, “The expected effectiveness and efficiency of an analytical procedure in identifying potential misstatements depends on, among other things, (a) the nature of the assertion, (b) the plausibility and predictability of the relationship, (c) the availability and reliability of the data used to develop the expectation, and (d) the precision of the expectation.

Question 2

Analytical procedures used in planning an audit should focus on identifying

Answer 2

1) enhancing the auditor’s understanding of the client’s business and the transactions and events that have occurred since the last audit; and
2) identifying areas of specific risk to the audit.

Question 3

Analytical procedures utilize

Answer 3

historical data and relationships to predict expected balances. Analytical procedures enable the auditor to gain an understanding of the client’s business and raise questions when current balances differ from expected balances. In this manner, the auditor is able to identify specific areas of risk that will need to be addressed during the audit.

Question 4

Analytical procedures are required during

Answer 4

planning and in the final review stage. They may be, but are not required to be, used as substantive tests.

Question 5

Analytical procedures used in the overall review stage of an audit

Answer 5

are intended to assist the auditor in assessing the conclusions reached and in evaluating the overall financial statement presentation.

Question 6

A basic premise underlying the application of analytical procedures is that

Answer 6

Plausible relationships among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary.

Question 7

What are the three categories of fraud-related risk factors that should be considered by the auditor?

Answer 7

• Incentives/Pressures (the motivation for committing fraud)
• Opportunities (the ability to commit fraud)
• Attitudes/Rationalizations (the justification or excuse for committing fraud).

Question 8

What is the definition of fraud that is relevant to the auditor?

Answer 8

An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in the financial statements.

Question 9

List the two types of financial-statement-related frauds.

Answer 9

1. Fraudulent financial reporting (sometimes called cooking the books)
2. Misappropriation of assets (covering up theft by false journal entries).

Question 10

Identify the auditor’s responsibility for detecting fraud in a financial statement audit.

Answer 10

1. Auditors must design audit to provide reasonable assurance of detecting material misstatements whether due to fraud or error;
2. Auditors are required to specifically assess the risk of material misstatement due to fraud;
3. Auditors must document the assessment of the risk of material misstatement due to fraud and the resulting response(s) associated with any risk factors identified.