Question

1. Which of the following is not a typical part of planning an audit?

	a.	Documenting the understanding with the client in an engagement letter.
	b.	Performing a physical examination of inventory.
	c.	Performing preliminary analytical procedures.
	d.	Developing an audit strategy.

2. The auditor is responsible for the selection of specific accounting principles.

True

False

3. If an auditor noted that a client's manufacturing process uses raw materials that have a volatile commodity price the auditor would likely determine that the client's inventory has a high _____ risk.

	a.	inherent
	b.	failure
	c.	control
	d.	Busines

4. The amount of misstatement an auditor is willing to accept in any given account balance is _______.

	a.	materiality
	b.	tolerable misstatement
	c.	control risk
	d.	inherent risk

5. Which assertion addresses whether transactions are recorded in the correct period?

	a.	Cutoff
	b.	Accuracy
	c.	Existence
	d.	Completeness

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Answer 1

1) Answer is Option 'B' i.e Performing a physical examination of inventory.
Reason - Inventory is physically verified after the audit process has begun. However all the other 3 options are included in audit planning.

2) Answer is 'False'.
Reason- The manager is responsible for the selection of specific accounting principles and not the auditor.

3) Answer is 'option A' i.e. inherent risk
Reason- Inherent risk is the risk posed by an error or omission in a financial statement due to a factor other than a failure of internal control. In a financial audit, inherent risk is most likely to occur when transactions are complex, or in situations that require a high degree of judgment in regard to financial estimates. The prices of Raw material are volatile which leads to an inherent risk.

4) Answer is 'option B' i.e. Tolerable missatement.
Answer - The amount of mis statement which the auditor will be ready to accept is which according to him are tolerable and won't affect the decisions of users of the financial statements.

5) Answer is Option 'A' i.e Cutoff

Reason :

• The assertion of accuracy and valuation is the statement that all figures presented in a financial statement are accurate and based on proper valuation of assets, liabilities and equity balances.
• The assertion of existence is the assertion that the assets, liabilities, and shareholders' equity balances appearing on a company's financial statements exist as stated at the end of the accounting period that the financial statement covers.
• The assertion of completeness is an assertion that the financial statements are thorough and include every item that should be included in the statement for a given accounting period.
• However The cut off he assertion is that all transactions were recorded within the correct reporting period.