ASUPRIN

ACTIVITY WORKSHEET
Compiled by: A. S. MALQUISTO No. 003

Name: RAYNERA, HEINZ DEAN E. Time & Schedule: MW 9:00 am – 11:00 am _

I. SHORT ANSWER QUESTIONS: Answer each question in a clear and organized paragraph. One or two
sentences that directly answer the short-answer question. Each question is worth 2 points.

1. What is the purpose of audit planning?

The audit plan is more specific than the overall audit strategy since it specifies the kind, time, and
scope of audit procedures that engagement team members will conduct. The audit plan provides an overview
of the audit's anticipated scope and execution. It outlines the audit processes in general terms.

2. “An audit plan is desirable when new staff members are assigned to an engagement, but an
experienced auditor should be able to conduct an audit without reference to it”. Do you agree?
Discuss briefly.
I disagree since audit reports should be completed at all levels, regardless of the auditor's degree of
experience. A documented audit program is required for all audits. Based on the auditors' initial risk
assessments, an audit program is a thorough description of the audit processes to be conducted during the
audit. As the audit proceeds, this program may need to be modified on a regular basis.

3. What factors should an external auditor use to assess the objectivity and competence of internal auditors?
Factors that an external auditor could examine while evaluating the internal auditors' competency.
Existence, sufficiency, and use of established internal audit processes or guidelines in areas like as risk
assessments, work programs, documentation, and reporting.

4. What are some limitations of the audit risk model?

 Formal evaluation is tough
 Its subjective determination
 Its handling of each risk factor as if it were distinct and independent, despite the fact that the
factors are not.
 The inability of audit technologies to correctly analyze each component of the model. Testing is
the foundation of auditing, and exact estimations of the model's components are impossible.

5. What is the responsibility of the auditor when it comes to fraud in a financial statement audit?
The auditor must plan and conduct the audit in order to achieve reasonable certainty that the
financial statements are free of substantial misrepresentation, whether due to fraud or error.

II. TRUE OR FALSE: Write the word TRUE for each correct statement; otherwise, write FALSE.

1. FALSE Audit risk is the auditor's exposure to loss or injury of his or her reputation from events arising
in connection with financial statements audited.
2. FALSE Audit risk and materiality significantly impact the auditor's decisions about how much and what
kind of evidence to gather.
3. FALSE Materiality is based on a quantitative analysis of the financial statements only.
4. TRUE In order to properly preplan the audit, the auditor must determine the engagement
team requirements and ensure the independence of the audit team and audit firm.
5. TRUE Analytical procedures used in planning are required by auditing standards.
6. TRUE When an auditor decides there is higher inherent risk for an account, one potential effect is that
more audit evidence will be required for that account.
7. TRUE As acceptable audit risk is decreased, the likely cost of conducting an audit increases.
8. TRUE An auditor must evaluate a specialist’s professional qualifications and understand the objectives of
the specialist’s work
9. TRUE There is no precise definition of materiality in the professional literature.
10. TRUE The presence of fraud risk factors increases the likelihood of fraud and usually suggests that
fraud is present.
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III. MULTIPLE CHOICE QUESTIONS: Read each item carefully. Select the correct/best answer for each of the
following questions and write the letter of your choice before the number.

_A 1. Adequate planning of the audit work helps the auditor of accomplishing the
following objectives, except:
A. Gathering of all corroborating audit evidence.
B. Ensuring that appropriate attention is devoted to important areas of the audit.
C. Identifying the areas that need a service of an expert.
D. The audit work is completed efficiently.
2. Which of the following is the ultimate concern of the knowledge about the business?
_A A. Consideration of how it affects the financial statements taken as a whole.
B. Assists the auditor in enforcing quality control procedures.
C. To assure that sufficient audit evidence is obtained.
D. It assists in determining the type of audit report to be issued.

_D 3. Which of the following statements reflects an auditor’s responsibility for detecting errors and
fraud?
A. An auditor is responsible for detecting employee errors and simple fraud, but not
for discovering fraudulent acts involving employee collusion or management
override.
B. An auditor should plan the audit to detect errors and fraud that are caused by
departure from PFRS.
C. An auditor is not responsible for detecting errors and fraud unless the application of
PSA would result in such detection.
D. An auditor should design the audit to provide reasonable assurance of detecting
errors and fraud that are material to the financial statements.

_D 4. The extent of planning will vary according to any of the following, except
A. size of the audit client
B. auditor’s 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

_C_ _ 5. The auditor should have or obtain knowledge of the client’s business sufficient to
A. Evaluate whether the financial statements are materially misstated
B. Document material weaknesses in accounting and internal control systems
C. Identify and understand events, transactions and practices that may have effect
on financial statements
D. Have an overall evaluation of whether financial assertions are fairly presented in
the financial statements

_B 6. Analytical procedures used in planning an audit should focus on

A. identifying material weaknesses in the internal control structure
B. enhancing the auditor’s understanding of the client’s business
C. testing individual account balance that depend on accounting estimates
D. evaluating the adequacy of evidence gathered concerning unusual balances

_D 7. In which of the following instances would an auditor be least likely to require the assistance
of an expert?
A. Assessing the value of inventories of works of art
B. Determining the value of unlisted securities
C. Determining the quantities of materials stored in piles
D. Determining the assessed value of fixed assets
_A 8. Which of the following is an example of fraudulent financial reporting?
A. Company management improperly records as revenue the proceeds of loan
B. The treasurer diverts customer payments to his personal use, concealing his actions
by debiting an expense account
C. An employee steals inventory and the “shrinkage” is recorded in cost of goods sold

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 D. An ployee bills his company for products not received, using the name of fictitious
em suppliers
_A 9. Which of the following statements concerning NOCLARs by clients is true?
A. An auditor’s responsibility for material misstatement caused by NOCLARs that have a direct
and material effect on the financial statements is the same as that for errors and fraud.
B. An audit in accordance with PSA normally includes audit procedures specifically
designed to detect NOCLARs that have an indirect but material effect on the financial
statements.
C. An auditor considers NOCLARs from the perspective of the reliability of management’s
representations rather than their relation to audit objectives derived from the financial
statement assertions.
D. An auditor has no responsibility to detect NOCLARs by clients that have an indirect
effect on the financial statements.

_C_ 10. As the materiality level is set at a lower amount, audit risk , while the amount of
substantive tests _ .
A. Increases, decreases C. Increases, increases
B. Decreases, increases D. Decreases, decreases

IV. SITUATIONAL PROBLEMS (10 points)

I. Geraldine is evaluating audit risk on the FMG engagement. Identify the risk component (Inherent, Control or
Detection Risks) most directly affected and indicate what effect (Increase or Decrease) the situation described
would have on this risk.

Risk Component Effect on Risk

1. The purchasing agent is required to obtain approval
from senior management for purchases in excess of CONTROL RISK DECREASE
P5,000.
2. A good portion of FMG’s fixed asset base consists of
capitalized leasehold items. INHERENT RISK INCREASE
3. FMG keeps a large quantity of cash on hand. INHERENT RISK INCREASE
4. FMG’s computer applications are not protected by
password. CONTROL RISK INCREASE
5. FMG’s financial statements do not require use of
significant estimates. INHERENT RISK DECREASE

II. For each of the following items, select the type of fraud (FFR- Fraudulent Financial Reporting or MOA –
Misappropriation of Assets) and the related fraud risk factor (Pressure, Opportunity or Rationalization).

Type of Fraud Fraud Risk Factor

1. FMG’s Board of Directors is controlled by Morris, the
majority stockholder, who also acts as chief executive FFR OPPURTUNITY
officer.
2. FMG does not appropriately monitor its internal
controls. MOA OPPURTUNITY
3. During 2020, FMG obtained a loan from Piggy National
Bank. Morris has personally guaranteed this loan. FFR PRESSURE
4. In an effort to increase the company’s visibility before
they go public, FMG has issued various press releases
FFR PRESSURE
projecting significant earnings growth for the current
year.
5. Numerous office equipment leases have been signed
during 2020 with company owned by Morris’ sister FFR OPPURTUNITY

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