CA Inter P5 · Chapter 2

Audit Strategy, Audit Planning and Audit Programme MCQs with Answers

11 multiple-choice questions on Audit Strategy, Audit Planning and Audit Programme for CA Inter P5 Auditing and Ethics. Try each one before revealing the answer and explanation.

1. Question 1

   According to SA 300, the overall audit strategy:

   • A) Is the written agreement on the terms of the engagement signed by management
   • B) Is prepared only after the audit fieldwork is completed
   • C) Is a detailed list of procedures to be applied to each account balance
   • D) Sets the scope, timing and direction of the audit and guides the development of the audit plan
   Show answer & explanation

   Answer: D) Sets the scope, timing and direction of the audit and guides the development of the audit plan

   SA 300 requires the auditor to establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the more detailed audit plan. The written agreement of terms is the engagement letter under SA 210, and a detailed list of procedures is the audit plan or programme.

2. Question 2

   Which of the following is a matter included in the audit plan rather than in the overall audit strategy?

   • A) The factors that are significant in directing the efforts of the engagement team
   • B) The reporting objectives of the engagement and the timing of the audit
   • C) The nature, timing and extent of planned further audit procedures at the assertion level
   • D) The characteristics of the engagement that define its scope, such as the reporting framework
   Show answer & explanation

   Answer: C) The nature, timing and extent of planned further audit procedures at the assertion level

   Under SA 300, the audit plan describes the nature, timing and extent of planned risk assessment procedures and further audit procedures at the assertion level. The scope-defining characteristics, reporting objectives and timing, and the factors directing the team's efforts are considered while establishing the overall audit strategy.

3. Question 3

   Midway through the audit of Neelgiri Tea Ltd., the audit team learns that a major subsidiary has been sold. The engagement partner says the audit plan, once approved, cannot be changed. Under SA 300:

   • A) Planning is a continual and iterative process; the strategy and plan must be updated as necessary and significant changes, with reasons, documented
   • B) The change should be made but need not be documented because the final audit file shows the work done
   • C) The plan may be altered only with the written approval of the company's board of directors
   • D) The plan may not be altered, and the effect of the sale should be dealt with in the next year's audit
   Show answer & explanation

   Answer: A) Planning is a continual and iterative process; the strategy and plan must be updated as necessary and significant changes, with reasons, documented

   SA 300 states that planning is not a discrete phase but a continual and iterative process. The auditor shall update and change the overall audit strategy and audit plan as necessary during the audit, and document significant changes and the reasons for them. Management approval is not required to change the auditor's plan.

4. Question 4

   SA 300 requires which of the following persons to be involved in planning the audit?

   • A) The engagement quality reviewer alone
   • B) The engagement partner and other key members of the engagement team
   • C) The chief financial officer of the entity
   • D) Only the article assistants who will perform the fieldwork
   Show answer & explanation

   Answer: B) The engagement partner and other key members of the engagement team

   SA 300 requires the engagement partner and other key members of the engagement team to be involved in planning the audit, including discussions among team members. Their involvement brings experience and insight into the planning process. The client's CFO does not plan the audit, and the engagement quality reviewer has a separate, objective review role rather than planning the audit.

5. Question 5

   Which of the following is NOT a preliminary engagement activity required at the beginning of the current audit engagement under SA 300?

   • A) Evaluating compliance with relevant ethical requirements, including independence
   • B) Establishing an understanding of the terms of the engagement as required by SA 210
   • C) Performing procedures regarding the continuance of the client relationship and the specific engagement
   • D) Performing tests of details on sales cut-off around the year-end
   Show answer & explanation

   Answer: D) Performing tests of details on sales cut-off around the year-end

   SA 300 requires the auditor, at the beginning of the engagement, to perform the procedures required by SA 220 regarding continuance of the client relationship and the specific engagement, evaluate compliance with ethical requirements including independence, and establish an understanding of the terms of engagement (SA 210). Cut-off testing is a further audit procedure performed in response to assessed risks, not a preliminary engagement activity.

6. Question 6

   Rajat & Co. has been appointed auditor of Jivika Ltd. for the first time. Which additional planning consideration applies specifically because it is an initial audit engagement?

   • A) Relying on the previous year's audit report as sufficient evidence for all opening balances
   • B) Reducing materiality to zero because the auditor has no past knowledge of the entity
   • C) Omitting the risk assessment for the first year because the predecessor already did it
   • D) Arranging, where permitted, to review the predecessor auditor's working papers and planning procedures for opening balances under SA 510
   Show answer & explanation

   Answer: D) Arranging, where permitted, to review the predecessor auditor's working papers and planning procedures for opening balances under SA 510

   SA 300 notes that in an initial audit the auditor may need to expand planning activities, including arrangements with the predecessor auditor to review its working papers and procedures required by SA 510 regarding opening balances. The predecessor's report alone is not sufficient evidence, and risk assessment cannot be skipped.

7. Question 7

   An audit programme is best described as:

   • A) A summary of the client's accounting policies prepared by management
   • B) A list of the client's employees responsible for each ledger
   • C) A statement of the auditor's opinion issued at the end of the audit
   • D) A detailed plan of audit procedures that also serves as a set of instructions to assistants and a record of work performed
   Show answer & explanation

   Answer: D) A detailed plan of audit procedures that also serves as a set of instructions to assistants and a record of work performed

   An audit programme sets out the audit procedures to be performed. It instructs the assistants on the work to be done, helps allocate and control work, and when initialled serves as evidence of the work performed. It is prepared by the auditor, not management.

8. Question 8

   Which of the following is generally regarded as a limitation of using a standard audit programme?

   • A) The work may become mechanical, and assistants may not look beyond the listed steps even when circumstances call for it
   • B) It removes the need for supervision and review of assistants' work
   • C) It makes it impossible to allocate work among assistants
   • D) It cannot be used as evidence of the work actually performed
   Show answer & explanation

   Answer: A) The work may become mechanical, and assistants may not look beyond the listed steps even when circumstances call for it

   A common criticism of audit programmes is that they can make the work mechanical and discourage initiative, so that unusual matters outside the programme are missed. They help allocate work and evidence work done, but supervision and review are still required. Programmes should be reviewed and adapted to the circumstances.

9. Question 9

   For the audit of Aranya Paints Ltd., the auditor selects profit before tax of Rs. 4.8 crore as the benchmark and applies 5% to determine materiality for the financial statements as a whole. Performance materiality is set at 75% of that materiality. What is performance materiality?

   • A) Rs. 18 lakh
   • B) Rs. 12 lakh
   • C) Rs. 24 lakh
   • D) Rs. 36 lakh
   Show answer & explanation

   Answer: A) Rs. 18 lakh

   Materiality = 5% x Rs. 480 lakh = Rs. 24 lakh. Performance materiality = 75% x Rs. 24 lakh = Rs. 18 lakh. Rs. 24 lakh is overall materiality, Rs. 36 lakh wrongly applies 7.5% to the benchmark, and Rs. 12 lakh applies 50%. SA 320 leaves the percentages to professional judgment; these are given in the question.

10. Question 10

    Under SA 320, the main purpose of setting performance materiality at an amount lower than materiality for the financial statements as a whole is to:

    • A) Reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole
    • B) Ensure that every individual misstatement below performance materiality is ignored
    • C) Determine the threshold above which misstatements must be reported in the auditor's report
    • D) Replace the need for professional judgment in evaluating misstatements
    Show answer & explanation

    Answer: A) Reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole

    SA 320 explains that planning only to detect individually material misstatements ignores the fact that misstatements which are individually immaterial may add up to a material amount, together with undetected misstatements. Performance materiality is set below overall materiality to provide a margin for this aggregation risk. It does not mean smaller misstatements are ignored, and it is not a reporting threshold.

11. Question 11

    At planning, the auditor of Dhruv Motors Ltd. set materiality at 1% of forecast revenue of Rs. 200 crore. Actual revenue for the year turns out to be Rs. 150 crore. Under SA 320, the auditor should:

    • A) Revise materiality to Rs. 1.5 crore but make no change to performance materiality or audit procedures
    • B) Continue with materiality of Rs. 2 crore because materiality is fixed at the planning stage
    • C) Revise materiality to Rs. 1.5 crore and determine whether performance materiality and the nature, timing and extent of further audit procedures remain appropriate
    • D) Revise materiality to Rs. 2.5 crore to reflect the shortfall in revenue
    Show answer & explanation

    Answer: C) Revise materiality to Rs. 1.5 crore and determine whether performance materiality and the nature, timing and extent of further audit procedures remain appropriate

    Original materiality = 1% x Rs. 200 crore = Rs. 2 crore. Based on actual revenue, 1% x Rs. 150 crore = Rs. 1.5 crore. SA 320 requires the auditor to revise materiality when aware of information that would have caused a different amount initially. When the revised amount is lower, the auditor must reconsider performance materiality and whether the nature, timing and extent of further audit procedures remain appropriate.