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BGC CPEA practice questions

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Question 1Audit Program Management

Which document formally authorizes an internal audit engagement and defines its objectives, scope, timing, and resource allocation?

  1. The risk register
  2. The engagement letter or audit program charter Correct answer.
  3. The corrective action log
  4. The audit report

Explanation

An engagement letter or approved audit program charter is the formal authorization that establishes the objective, scope, timing, and resources for a specific audit. It gives the audit team its mandate and creates accountability with the auditee before fieldwork begins.

Question 2Audit Program Management

An audit program is best described as which of the following?

  1. A list of vendor contracts under review
  2. A detailed plan listing the procedures to be performed to achieve engagement objectives Correct answer.
  3. A schedule of employee training sessions
  4. A summary of prior-year financial results

Explanation

An audit program is the detailed work plan that specifies the procedures, extent of testing, and documentation needed to meet the engagement's objectives. It translates the engagement scope into executable steps that guide and evidence the audit work.

Question 3Audit Program Management

During planning, an auditor identifies a significant change in a key process since the prior audit. What is the most appropriate program management response?

  1. Revise the audit program to address the new risks and document the rationale Correct answer.
  2. Defer the engagement until the process stabilizes
  3. Perform the existing program unchanged to preserve comparability
  4. Reduce sample sizes because the process is familiar

Explanation

Audit programs must remain responsive to current risks, so a material process change warrants updating procedures and documenting why the program changed. This preserves the link between assessed risk and the work performed.

Question 4Audit Program Management

Which element is essential for an audit program to be considered properly approved before fieldwork starts?

  1. Sign-off by an authorized audit manager or engagement supervisor Correct answer.
  2. A verbal agreement from the auditee
  3. A copy sent to every department head
  4. Publication on the company intranet

Explanation

Programs should be reviewed and approved by an appropriately authorized person, typically an audit manager or engagement supervisor, before execution. This approval evidences that the plan was judged adequate and risk-appropriate.

Question 5Audit Program Management

What is the primary purpose of documenting workpapers that reference each step of the audit program?

  1. To provide evidence that planned procedures were performed and support conclusions Correct answer.
  2. To increase the length of the audit file
  3. To replace the final audit report
  4. To satisfy payroll reporting requirements

Explanation

Workpapers link the program steps to the evidence obtained, demonstrating that procedures were actually performed and that conclusions are supported. This documentation is central to quality review and to defending the audit's findings.

Question 6Audit Program Management

An audit program includes a step requiring confirmation of account balances with third parties. Which assertion does this procedure most directly address?

  1. Presentation
  2. Rights and obligations
  3. Existence Correct answer.
  4. Classification

Explanation

External confirmations provide direct evidence from an independent source that a recorded balance or transaction exists. They are a primary substantive procedure for the existence assertion.

Question 7Audit Program Management

Which of the following is the most appropriate basis for determining the extent of testing in an audit program?

  1. The number of staff available
  2. The length of the prior audit report
  3. The assessed level of risk and desired confidence Correct answer.
  4. The personal preference of the lead auditor

Explanation

The extent of testing should be driven by assessed risk and the confidence level needed to support conclusions. Higher risk generally requires more extensive or more persuasive procedures.

Question 8Audit Program Management

What does a roll-forward procedure accomplish when an audit spans a period after interim testing?

  1. It replaces the need for any substantive testing
  2. It eliminates the need for management representations
  3. It extends conclusions from an interim date to the period end Correct answer.
  4. It restarts the audit program from the beginning

Explanation

Roll-forward procedures update evidence obtained at an interim date so conclusions remain valid through period end. They cover the remaining period and identify significant changes or transactions since interim testing.

Question 9Audit Program Management

An auditor designs a sampling plan for a control that operates many times per day. Which factor most directly increases the required sample size?

  1. A shorter audit report
  2. A lower tolerable deviation rate Correct answer.
  3. A higher budget for travel
  4. A larger audit team

Explanation

A lower tolerable deviation rate means the auditor will accept fewer exceptions, which requires a larger sample to achieve the desired confidence. Tolerable rate, expected deviation rate, and confidence level jointly drive sample size.

Question 10Audit Program Management

A program step states 'review the reconciliation for unusual items.' Why is this step considered poorly designed?

  1. It lacks defined criteria for what constitutes unusual and how many items to examine Correct answer.
  2. It duplicates a financial statement audit procedure
  3. It requires too much documentation
  4. It is too specific about which items to select

Explanation

Effective program steps specify the population, selection criteria, and extent of work so results are consistent and reviewable. Vague terms like 'unusual' leave judgment undefined and make the evidence difficult to evaluate.

Question 11Audit Program Management

When an auditor deviates from the approved audit program during fieldwork, what is the most appropriate action?

  1. Document the deviation and the reason, and obtain approval where required Correct answer.
  2. Silently substitute a different procedure
  3. Wait until the next audit cycle to note the change
  4. Abandon the engagement

Explanation

Deviations should be documented with their rationale and approved by the appropriate level of audit management, so the file reflects what was actually done and why. This maintains the integrity of the program as a control document.

Question 12Audit Program Management

Which of the following best describes the relationship between the audit program and the engagement's risk assessment?

  1. The program replaces the risk assessment
  2. The program is designed to respond to the risks identified during planning Correct answer.
  3. The program is prepared only after the report is drafted
  4. The program is independent of risk assessment and follows a fixed template

Explanation

The audit program should be a direct response to the risks identified during planning, targeting procedures at areas of higher risk. This alignment is what makes the program risk-based rather than generic.

Question 13Audit Program Management

An auditor plans to rely on the work of internal audit for a portion of the engagement. What should the external auditor's program include?

  1. No additional steps because internal audit is independent
  2. Procedures to evaluate the objectivity, competence, and quality of the internal audit work Correct answer.
  3. A requirement that internal audit report to the external auditor
  4. Reperformance of every internal audit procedure

Explanation

Before relying on internal audit work, the external auditor must evaluate the function's objectivity, competence, and the quality of its work, and design procedures accordingly. This evaluation supports whether that work can be used as evidence.

Question 14Audit Program Management

Which of the following is the best example of a substantive analytical procedure in an audit program?

  1. Comparing current-year revenue to prior-year revenue adjusted for known volume changes Correct answer.
  2. Confirming a bank balance
  3. Observing the physical inventory count
  4. Inspecting a signed contract

Explanation

Substantive analytical procedures evaluate financial information by developing expectations and comparing them with recorded amounts. Adjusting prior-year revenue for known volume changes establishes such an expectation.

Question 15Audit Program Management

An audit program calls for testing a system-generated report used as a population for sampling. What should the auditor do first?

  1. Assume the report is complete because it is automated
  2. Test the completeness and accuracy of the report Correct answer.
  3. Ask the auditee to verbally confirm the totals
  4. Increase the sample size to compensate

Explanation

Before using a system report as a population, the auditor must establish that it is complete and accurate, often through reconciliation or independent recomputation. Otherwise the sampling conclusion rests on an unverified population.

Question 16Audit Program Management

What is the primary role of a quality review of the audit program and file before the report is issued?

  1. To negotiate findings with management
  2. To confirm the work performed supports the conclusions and meets quality standards Correct answer.
  3. To reassign staff to other engagements
  4. To set the audit fee

Explanation

Quality review provides an independent check that the program was executed as planned and that the evidence supports the conclusions reached. It is a safeguard for the overall quality of the engagement.

Question 17Audit Program Management

An auditor finds that a planned procedure cannot be performed because records were destroyed. What is the most appropriate program management action?

  1. Extend the audit indefinitely
  2. Ignore the step and conclude the area is satisfactory
  3. Issue the report without mentioning the limitation
  4. Record the limitation and consider alternative procedures to obtain sufficient evidence Correct answer.

Explanation

When a planned procedure cannot be performed, the auditor should document the limitation and design alternative procedures to obtain sufficient appropriate evidence. If evidence remains insufficient, the scope limitation must be communicated.

Question 18Audit Program Management

Which of the following best describes the purpose of a walkthrough in the context of audit program design?

  1. To confirm the auditor's understanding of a process and identify control points Correct answer.
  2. To test the operating effectiveness of controls over the full year
  3. To calculate the sample size for substantive testing
  4. To document management's response to findings

Explanation

A walkthrough traces a transaction through the process to confirm the auditor's understanding and to identify where controls exist. It informs program design by validating the process description before testing begins.

Question 19Audit Program Management

An audit program's budgeted hours are exceeded significantly due to unexpected complexity. What should the engagement supervisor do?

  1. Assess the impact on scope and resources and document the resolution Correct answer.
  2. Stop testing immediately
  3. Reduce documentation to save time
  4. Charge the overrun to an unrelated engagement

Explanation

Significant overruns should trigger a reassessment of scope, risk, and resource needs, with the resolution documented for transparency. Cutting documentation or misallocating costs would compromise quality and integrity.

Question 20Audit Program Management

Which of the following is the most appropriate way to handle a finding that emerges outside the approved audit scope?

  1. Document the observation and escalate for a decision on whether to extend scope Correct answer.
  2. Include it in the report without any supporting work
  3. Expand the current program without any approval
  4. Discard the observation as irrelevant

Explanation

Observations outside scope should be documented and escalated so management decides whether to expand the engagement with proper approval and resources. This preserves governance over scope changes while not losing potentially important information.

Question 21Audit Program Management

In a risk-based audit program, which area should typically receive the most extensive testing?

  1. An area with no prior findings
  2. An area with the smallest transaction volume
  3. An area with low risk and strong controls
  4. An area with high inherent risk and weak controls Correct answer.

Explanation

High inherent risk combined with weak controls produces the greatest residual risk, so the program should direct the most extensive procedures there. Testing effort should follow risk rather than convenience or history.

Question 22Audit Program Management

An auditor uses a standard audit program template across multiple engagements. Which practice best preserves a risk-based approach?

  1. Using the template only for large entities
  2. Applying the template identically to every entity
  3. Tailoring the template to entity-specific risks and documenting the changes Correct answer.
  4. Removing all customization to improve efficiency

Explanation

Templates are useful starting points, but the program must be tailored to each entity's specific risks and circumstances, with the tailoring documented. Uniform application risks omitting relevant procedures or performing unnecessary ones.

Question 23Audit Program Management

An auditor concludes that a control tested at interim operated effectively, but evidence shows the control changed materially afterward. What is the most appropriate conclusion?

  1. Additional testing of the revised control is needed before relying on it through period end Correct answer.
  2. The change should be ignored because it occurred after interim
  3. The control should be assumed ineffective for the entire year
  4. Interim conclusions remain valid without adjustment

Explanation

A material change to a control after interim testing invalidates reliance on the earlier evidence for the remaining period. The auditor must test the revised control, or perform alternative procedures, before concluding on operating effectiveness.

Question 24Audit Program Management

An engagement team proposes reducing substantive procedures because controls were assessed as effective. Which condition must be satisfied for this reduction to be appropriate?

  1. The budget has been reduced
  2. The controls have been tested and found to operate effectively throughout the relevant period Correct answer.
  3. Management has requested fewer procedures
  4. The prior year's audit had no findings

Explanation

Reducing substantive work based on controls requires evidence that those controls operated effectively throughout the period of reliance. Without such testing, the reduction is not supported and the evidence base may be insufficient.

Question 25Audit Program Management

An auditor identifies that two program steps provide overlapping evidence for the same assertion. What is the most defensible program management decision?

  1. Add a third identical step for confirmation
  2. Evaluate whether one step can be eliminated or redesigned to improve coverage of other risks Correct answer.
  3. Remove both steps because overlap is always undesirable
  4. Retain both steps to increase documentation volume

Explanation

Redundant procedures should be assessed for whether they add value; reallocating effort to under-covered risks generally improves the program's efficiency and coverage. Overlap is not automatically wrong, but it should be a deliberate design choice.

Question 26Audit Program Management

Which of the following best describes the primary purpose of an audit program?

  1. To provide a detailed plan of the nature, timing, and extent of audit procedures to be performed. Correct answer.
  2. To record the audit evidence obtained and the auditor's evaluation of that evidence.
  3. To document the auditor's preliminary understanding of the entity's internal control environment.
  4. To summarize the auditor's conclusions about the fairness of the financial statements.

Explanation

An audit program is a detailed plan that specifies the nature, timing, and extent of audit procedures to be performed. It serves as a roadmap for the engagement team and helps ensure that the audit is properly planned and executed. While it may include other elements, its primary purpose is to direct the audit work.

Question 27Audit Program Management

When developing an audit program, which of the following is the most important factor in determining the nature of audit procedures?

  1. The assessed risks of material misstatement at the assertion level. Correct answer.
  2. The availability of audit staff with relevant industry experience.
  3. The budgeted number of hours allocated to each audit area.
  4. The client's preference for certain types of audit procedures.

Explanation

The nature of audit procedures should be responsive to the assessed risks of material misstatement. Higher-risk assertions require more reliable and extensive procedures, while lower-risk areas may require less. Staffing, client preferences, and budget are logistical considerations but do not drive the selection of procedures.

Question 28Audit Program Management

An auditor is designing an audit program for a client with a decentralized accounting system across multiple locations. Which approach is most appropriate for determining the extent of testing at each location?

  1. Assess the risk of material misstatement at each location and allocate testing accordingly. Correct answer.
  2. Test an equal number of transactions at each location to ensure uniformity.
  3. Rotate testing among locations each year to cover all locations over a three-year cycle.
  4. Focus testing on the largest location and perform only analytical procedures at others.

Explanation

The extent of testing should be based on the assessed risk of material misstatement at each location. Higher-risk locations require more extensive testing, while lower-risk locations may require less. A risk-based approach ensures that audit resources are directed to areas with the greatest potential for material misstatement.

Question 29Audit Program Management

Which of the following best describes the relationship between the audit program and the auditor's documentation requirements?

  1. The audit program is the only documentation required for an audit engagement.
  2. The audit program is a required part of audit documentation and should be updated to reflect significant changes during the engagement. Correct answer.
  3. The audit program must be included in the audit file, but it does not need to be updated after fieldwork begins.
  4. The audit program is optional documentation that can be omitted if the auditor uses a standardized template.

Explanation

Audit standards require that the audit program be documented as part of the audit file. It should be updated to reflect any significant changes in the planned procedures during the engagement, ensuring that the documentation accurately reflects the work performed. A standardized template does not eliminate the need to document the program.

Question 30Audit Program Management

An auditor discovers that a planned audit procedure is ineffective because the client's controls over the procedure have changed since the planning phase. What is the most appropriate course of action?

  1. Continue with the original procedure to maintain consistency with the approved audit program.
  2. Inform the client that the audit cannot proceed until the controls are restored to their original state.
  3. Abandon the audit engagement due to the significant change in controls.
  4. Document the change and perform alternative procedures that address the same audit objective. Correct answer.

Explanation

When a planned procedure becomes ineffective due to changes in controls, the auditor should revise the audit program to perform alternative procedures that still address the relevant risk. The change and the rationale should be documented, and the revised procedures should be communicated to the engagement team. Continuing with an ineffective procedure would not provide sufficient appropriate evidence.

Question 31Audit Planning and Preparation

Which document establishes the overall scope, timing, and direction of an audit engagement and is prepared during the planning phase?

  1. The prior-year working paper index
  2. The audit strategy memorandum Correct answer.
  3. The management representation letter
  4. The engagement completion checklist

Explanation

The audit strategy sets the scope, timing, and direction of the engagement and guides development of the more detailed audit plan. It is drafted early in planning so that resources and focus areas are aligned before fieldwork begins.

Question 32Audit Planning and Preparation

An auditor is determining the nature, timing, and extent of further audit procedures. Which input is most directly used to make that determination?

  1. The assessed risks of material misstatement at the assertion level Correct answer.
  2. The audit firm's overall annual training calendar
  3. The number of employees in the client's payroll department
  4. The client's marketing budget for the coming year

Explanation

Further audit procedures are designed in response to the assessed risks of material misstatement at the assertion level. Higher assessed risk drives more persuasive or more extensive procedures. Other items listed are not risk assessments tied to financial statement assertions.

Question 33Audit Planning and Preparation

What is the primary purpose of obtaining an understanding of the entity and its environment during audit planning?

  1. To identify and assess risks of material misstatement Correct answer.
  2. To determine the client's tax liability
  3. To satisfy a statutory filing requirement
  4. To guarantee that no fraud has occurred

Explanation

Understanding the entity, its environment, and its internal control provides the basis for identifying and assessing risks of material misstatement. That risk assessment then informs the design of further audit procedures. Understanding alone cannot guarantee detection of all fraud or determine tax positions.

Question 34Audit Planning and Preparation

Which of the following best describes the concept of materiality as applied at the planning stage?

  1. A fixed percentage that must always equal five percent of total assets
  2. The amount of audit fee agreed with the client
  3. The total dollar value of all transactions tested during fieldwork
  4. A threshold above which misstatements could influence users' economic decisions Correct answer.

Explanation

Planning materiality is the amount above which misstatements, individually or in aggregate, could reasonably influence users' economic decisions. It is a matter of professional judgment and is not a fixed formula tied to one benchmark. It guides the extent of testing and evaluation of identified misstatements.

Question 35Audit Planning and Preparation

An auditor sets performance materiality below overall materiality. What is the main reason for doing so?

  1. To satisfy the client's internal budgeting process
  2. To eliminate the need for substantive testing
  3. To reduce the probability that uncorrected and undetected misstatements exceed materiality Correct answer.
  4. To increase the audit fee charged to the client

Explanation

Performance materiality is set below overall materiality to provide a buffer against the aggregation of individually immaterial misstatements and undetected misstatements. This reduces the risk that total uncorrected misstatement exceeds materiality. It does not remove the need for substantive procedures.

Question 36Audit Planning and Preparation

Which of the following is an example of an inherent risk factor rather than a control risk factor?

  1. Complex revenue recognition involving multiple performance obligations Correct answer.
  2. Lack of management review over journal entries
  3. Absence of a periodic bank reconciliation control
  4. A poorly designed segregation of duties in purchasing

Explanation

Inherent risk arises from the nature of the transaction or account independent of controls, such as complexity in revenue recognition. Control risk relates to the risk that controls fail to prevent or detect misstatement. The other options describe weaknesses in the design or operation of controls.

Question 37Audit Planning and Preparation

An auditor plans to rely on controls over the approval of credit sales. Which procedure best provides evidence about the operating effectiveness of that control?

  1. Testing a sample of sales orders for evidence of credit approval Correct answer.
  2. Reviewing the written credit policy manual
  3. Observing the credit department's office layout
  4. Inquiring of the sales manager about the approval process

Explanation

Testing a sample of transactions for evidence of the control operating as designed provides direct evidence of operating effectiveness. Inquiry alone, review of policy documents, or observation of the workplace does not confirm that approvals actually occurred for individual transactions.

Question 38Audit Planning and Preparation

Which of the following best describes the role of analytical procedures in the planning phase of an audit?

  1. To satisfy the requirement for a management representation letter
  2. To assist in identifying areas of higher risk that require attention Correct answer.
  3. To confirm that the financial statements are free of fraud
  4. To provide sufficient appropriate evidence to replace all substantive testing

Explanation

Planning analytical procedures help the auditor identify unusual relationships and areas that may represent higher risk. They highlight matters requiring further attention during the audit. They do not replace substantive testing or confirm the absence of fraud.

Question 39Audit Planning and Preparation

When planning an audit, the auditor considers the risk of fraud. Which condition most strongly suggests an incentive or pressure to commit fraudulent financial reporting?

  1. The audit committee meets quarterly
  2. The entity has a formal code of conduct
  3. Management's compensation is tied to aggressive earnings targets Correct answer.
  4. The entity uses a computerized accounting system

Explanation

Incentives or pressures, such as compensation linked to aggressive earnings targets, are one element of the fraud risk triangle. Such pressure can motivate management to manipulate reported results. A code of conduct, active audit committee, and computerized systems are not pressure indicators.

Question 40Audit Planning and Preparation

An auditor is deciding whether to use the work of an internal audit function during planning. Which factor is most relevant to that decision?

  1. The size of the client's marketing department
  2. The number of years the client has been in business
  3. The competence and objectivity of the internal audit function Correct answer.
  4. The location of the client's head office

Explanation

When considering reliance on internal audit work, the auditor evaluates the competence and objectivity of the internal audit function. These qualities determine whether the work is sufficiently reliable to be useful. Company age, marketing size, and office location are not relevant to that evaluation.

Question 41Audit Planning and Preparation

Which of the following is the most appropriate source for the auditor to use when establishing an understanding of the entity's industry and regulatory environment?

  1. The audit firm's internal social event schedule
  2. Industry publications and regulatory guidance applicable to the sector Correct answer.
  3. The client's internal draft of next year's product pricing
  4. The prior auditor's personal notes on unrelated clients

Explanation

Industry publications and regulatory guidance provide relevant, objective information about the entity's sector and regulatory obligations. This helps the auditor understand business drivers and compliance risks. Internal drafts, unrelated notes, and firm social schedules are not appropriate sources for this purpose.

Question 42Audit Planning and Preparation

An auditor determines that the risk of material misstatement for inventory valuation is high. What is the most appropriate planning response?

  1. Postpone all inventory procedures to the following year
  2. Rely entirely on management's verbal assurances about inventory
  3. Assign more experienced staff and increase the extent of substantive testing over inventory Correct answer.
  4. Reduce the amount of evidence gathered because risk is already known

Explanation

When risk is assessed as high, the auditor responds by increasing the extent and persuasiveness of procedures and by assigning more experienced personnel. This ensures sufficient appropriate evidence is obtained for the higher-risk area. Reducing evidence or relying on verbal assurances would be inappropriate.

Question 43Audit Planning and Preparation

Which of the following best describes the relationship between the audit plan and the audit strategy?

  1. The audit plan is more detailed and is developed from the audit strategy Correct answer.
  2. The audit plan replaces the need for an audit strategy
  3. The two documents are identical in content and purpose
  4. The audit strategy is developed only after the audit plan is complete

Explanation

The audit strategy sets the broad direction, and the audit plan elaborates the nature, timing, and extent of procedures needed to implement that strategy. The plan is therefore more detailed and derived from the strategy. They serve distinct but connected purposes.

Question 44Audit Planning and Preparation

An auditor is planning the audit of a company with a decentralized accounting function across several locations. Which planning consideration is most relevant?

  1. Ensuring every location has an identical headcount
  2. Requiring all locations to close their books on the same day
  3. Determining which locations or components require audit attention Correct answer.
  4. Confirming that all locations use the same office furniture

Explanation

In a decentralized structure, the auditor must decide which locations or components are significant and require audit procedures. This scoping decision focuses effort where risk and materiality are greatest. Furniture, headcount, and closing dates are not planning considerations for location coverage.

Question 45Audit Planning and Preparation

What is the auditor's primary objective when performing a preliminary review of the client's accounting policies during planning?

  1. To negotiate the audit fee with the client
  2. To prepare the client's financial statements on management's behalf
  3. To identify areas where accounting policies are complex or subject to judgment Correct answer.
  4. To finalize the audit opinion before fieldwork

Explanation

Reviewing accounting policies during planning helps the auditor identify complex or judgmental areas that may carry higher risk of misstatement. These areas then receive focused attention in the audit plan. The auditor does not prepare statements, finalize opinions early, or negotiate fees through this review.

Question 46Audit Planning and Preparation

Which of the following best describes the purpose of the engagement letter in audit planning?

  1. To document the agreed terms of the engagement and reduce misunderstanding Correct answer.
  2. To provide the auditor's final opinion on the financial statements
  3. To serve as evidence that the financial statements are accurate
  4. To replace the need for an audit strategy

Explanation

The engagement letter records the agreed terms, responsibilities, and scope of the engagement, helping prevent misunderstandings between auditor and client. It is an administrative and contractual document. It does not attest to accuracy, substitute for strategy, or contain the audit opinion.

Question 47Audit Planning and Preparation

An auditor is considering whether to use a specialist to value complex financial instruments. This decision is most appropriately made during which phase?

  1. During the client's annual general meeting
  2. Only after the audit report has been issued
  3. After all fieldwork is complete
  4. Planning, when assessing the nature and complexity of the balances involved Correct answer.

Explanation

The need for a specialist is assessed during planning when the auditor evaluates the nature and complexity of the balances and the evidence required. Early identification allows proper resourcing and timing. Deciding after fieldwork or after the report is issued would be too late.

Question 48Audit Planning and Preparation

Which of the following is the best example of a substantive analytical procedure that could be planned for a stable recurring expense?

  1. Testing the operating effectiveness of the approval control over the expense
  2. Developing an expectation of the expense using prior periods and known drivers, then comparing to the recorded amount Correct answer.
  3. Physically inspecting the equipment that generated the expense
  4. Sending a confirmation to the supplier of the expense

Explanation

A substantive analytical procedure develops a precise expectation and compares it to the recorded amount, investigating significant differences. This is efficient for predictable, stable expenses. Confirmations, inspection, and control testing are different types of procedures.

Question 49Audit Planning and Preparation

An auditor identifies a significant risk related to a related-party transaction. What is the most appropriate planning action?

  1. Assume the transaction is properly recorded because it was approved by the board
  2. Design procedures specifically tailored to the related-party risk, including reviewing underlying agreements Correct answer.
  3. Rely solely on management's written confirmation of the terms
  4. Exclude the transaction from the audit scope because it is unusual

Explanation

Significant risks require tailored procedures that obtain persuasive evidence, such as reviewing underlying agreements and corroborating terms. Board approval and management confirmation alone are not sufficient evidence. Significant risks cannot be excluded from scope.

Question 50Audit Planning and Preparation

Which of the following best explains why the auditor documents the audit plan and any significant changes to it?

  1. Documentation replaces the need for professional judgment
  2. Documentation is required only when the client requests it
  3. Documentation guarantees that no misstatements exist
  4. Documentation provides evidence of the basis for the audit and supports review and continuity Correct answer.

Explanation

Documenting the plan and significant changes provides a record of the basis for decisions and supports supervision, review, and continuity across the engagement. It does not guarantee accuracy or replace judgment. Documentation is required by standards, not only on client request.