Question 1

If inherent risk is considered at the assertion level,why does the nature of the client's business affect inherent risk?

Accepted Answer

A) Certain accounts,such as inventory,are affected by the nature of the client's business. 
B) If the client has very basic manufacturing processes,inherent risk is low. 
C) When there is a risk of technological obsolescence,a specialist must be used during the engagement. 
D) Accounts such as cash,notes,and mortgages payable vary depending upon the type of business. 
A) Certain accounts,such as inventory,are affected by the nature of the client's business. 
B) If the client has very basic manufacturing processes,inherent risk is low. 
C) When there is a risk of technological obsolescence,a specialist must be used during the engagement. 
D) Accounts such as cash,notes,and mortgages payable vary depending upon the type of business. A

Question 2

Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit function.An effective auditor will

Accepted Answer

A) take any means available to reduce the risk to the lowest possible level. 
B) set the risk level between 5% and 10%. 
C) perform the audit procedures first and quantitatively set the risk level before forming an opinion and writing the report. 
D) recognize that risks exist and deal with those risks by performing high quality audits. 
A) take any means available to reduce the risk to the lowest possible level. 
B) set the risk level between 5% and 10%. 
C) perform the audit procedures first and quantitatively set the risk level before forming an opinion and writing the report. 
D) recognize that risks exist and deal with those risks by performing high quality audits. D

Question 3

GreenGrow Limited is a local landscaping company that does household and commercial landscaping.Primarily,it helps businesses select plants and manage the plants.It also has regular maintenance contracts such as watering,weeding,and mowing.In the winter,it has some contracts for managing the indoor plants in shopping malls and does snow clearing to help boost this low-income season.
Joey,the majority shareholder of GreenGrow is ecstatic.He has managed to come in as the low bidder for a new type of contract.He bid on the construction of a track for the track and field area of a local university.A piece of land on the north end of the university is being cleared and GreenGrow will be leveling the land and placing a bed of crushed stone for the track.Joey has just the right person to be in charge.Jack has previous experience working as an assistant on a road crew and knows how to use the surveying equipment needed to keep the track level.This is a big contract,and will increase revenues by one third!
Required:
Assess inherent risk for revenue for GreenGrow Limited.

Accepted Answer

Inherent risk for revenue for GreenGrow Limited seems high.
Reasons:
•Income in the winter season is volatile,depending upon snowfall.
•There is a new contract for a track which is expected to comprise 30% of income.GreenGrow has never done this kind of work before,and may not be able to complete the contract in a timely manner.
•The above is a non-routine transaction,which may be recorded incorrectly;an auditor would need to determine that the costs and revenues are properly matched in this contract,which would require different accounting methods than maintenance and landscaping revenues.
•the company is relying heavily on Jack's previous experience working as an assistant on a road crew,which may not be sufficient experience to fulfill the contract.

Question 4

What audit procedure would be an auditor's response to address management override of controls ?

Accepted Answer

A) Evaluate business rationale for significant unusual transactions. 
B) Evaluate systematic processing of large volumes of day-to-day ordinary transactions. 
C) Evaluate possibilities of petty cash embezzlements. 
D) Evaluate in detail payroll transactions. 
A) Evaluate business rationale for significant unusual transactions. 
B) Evaluate systematic processing of large volumes of day-to-day ordinary transactions. 
C) Evaluate possibilities of petty cash embezzlements. 
D) Evaluate in detail payroll transactions.

Question 5

Senior managers of Mega Corp.are entitled to receive large bonuses if they achieve earnings targets.What is the effect of this on the risks associated with recording of revenue?

Accepted Answer

A) It increases fraud risks associated with revenue. 
B) It decreases fraud risks associated with revenue. 
C) It increases detection risks associated with revenue. 
D) It decreases control risks associated with revenue. 
A) It increases fraud risks associated with revenue. 
B) It decreases fraud risks associated with revenue. 
C) It increases detection risks associated with revenue. 
D) It decreases control risks associated with revenue.

Question 6

As the effectiveness of internal control increases,what happens to control risk?

Accepted Answer

A) It stays the same. 
B) It increases. 
C) It changes based on the audit procedures conducted. 
D) It decreases. 
A) It stays the same. 
B) It increases. 
C) It changes based on the audit procedures conducted. 
D) It decreases.

Question 7

As per CAS 240,when an auditor inquires about the risk of fraud and errors within the organization,what are the auditors not required to discuss with management?

Accepted Answer

A) Management's assessment of the risk that the financial statements may be materially misstated due to fraud. 
B) Management's communication,if any,to those charged with governance regarding its processes for identifying and responding to the risks of fraud. 
C) Management's process for identifying and responding to the risks of fraud in the entity. 
D) The auditor's analytical procedures. 
A) Management's assessment of the risk that the financial statements may be materially misstated due to fraud. 
B) Management's communication,if any,to those charged with governance regarding its processes for identifying and responding to the risks of fraud. 
C) Management's process for identifying and responding to the risks of fraud in the entity. 
D) The auditor's analytical procedures.

Question 8

Fraud risk factors are examples of factors that increase the risk of fraud.Which of the following is an example of a management "incentives or pressures" risk factor?

Accepted Answer

A) Customer demand for a new product line was significantly less than expected. 
B) Management and the auditors disagree on how to value a large contract in progress. 
C) There is only one board member who understands financial statements and she has suffered a heart attack. 
D) There has been significant turnover in the accounting department in the last year. 
A) Customer demand for a new product line was significantly less than expected. 
B) Management and the auditors disagree on how to value a large contract in progress. 
C) There is only one board member who understands financial statements and she has suffered a heart attack. 
D) There has been significant turnover in the accounting department in the last year.

Question 9

PA is auditing a client where the accounts receivable are in worse shape than last year: many accounts are significantly overdue.How would this fact be dealt with in the audit risk model?

Accepted Answer

A) increase inherent risk for accounts receivable 
B) decrease inherent risk for accounts receivable 
C) increase control risk for accounts receivable 
D) decrease control risk for accounts receivable 
A) increase inherent risk for accounts receivable 
B) decrease inherent risk for accounts receivable 
C) increase control risk for accounts receivable 
D) decrease control risk for accounts receivable

Question 10

Which of the following would be a signal of possible problems with management integrity?

Accepted Answer

A) reliance on debt rather than equity for financing permanent assets 
B) rotation of holidays in the supervisory area over a period of months 
C) rapidly declining profits or increasing losses over a period of years 
D) frequent disagreements with regulators and the Canada Revenue Agency 
A) reliance on debt rather than equity for financing permanent assets 
B) rotation of holidays in the supervisory area over a period of months 
C) rapidly declining profits or increasing losses over a period of years 
D) frequent disagreements with regulators and the Canada Revenue Agency

Question 11

A PA recently finished the audit of a family-owned business.Now she is working on a large client with about 50 times the assets and 30 times total revenue.For the larger client,the PA will likely have

Accepted Answer

A) no changes to the audit risk model. 
B) higher control risk. 
C) higher acceptable audit risk. 
D) lower acceptable audit risk. 
A) no changes to the audit risk model. 
B) higher control risk. 
C) higher acceptable audit risk. 
D) lower acceptable audit risk.

Question 12

An inherent risk (IR)of 40% and a control risk (CR)of 60% affect detection risk and planned evidence differently than an

Accepted Answer

A) IR of 60% and CR of 40%. 
B) IR of 100% and CR of 24%. 
C) IR of 80% and CR of 30%. 
D) IR of 70% and CR of 30%. 
A) IR of 60% and CR of 40%. 
B) IR of 100% and CR of 24%. 
C) IR of 80% and CR of 30%. 
D) IR of 70% and CR of 30%.

Question 13

If from last year to the current year's audit,inherent risk has stayed constant but control risk is higher (it is more likely that controls do not detect material errors),what is the likely effect on detection risk?

Accepted Answer

A) Detection risk will increase. 
B) Detection risk will decrease. 
C) Detection risk will stay the same. 
D) Detection risk will need less documentation. 
A) Detection risk will increase. 
B) Detection risk will decrease. 
C) Detection risk will stay the same. 
D) Detection risk will need less documentation.

Question 14

The audit risk model is used primarily

Accepted Answer

A) for planning purposes in determining how much evidence to accumulate. 
B) while doing tests of controls. 
C) to determine the type of opinion to express. 
D) to evaluate the evidence that has been gathered. 
A) for planning purposes in determining how much evidence to accumulate. 
B) while doing tests of controls. 
C) to determine the type of opinion to express. 
D) to evaluate the evidence that has been gathered.

Question 15

All other factors held constant,if the auditor decreases acceptable audit risk then

Accepted Answer

A) there will be less documentation in the audit file. 
B) total audit evidence and audit costs will increase. 
C) it will also be necessary to decrease either control risk or inherent risk. 
D) less supervision of the audit team will be required. 
A) there will be less documentation in the audit file. 
B) total audit evidence and audit costs will increase. 
C) it will also be necessary to decrease either control risk or inherent risk. 
D) less supervision of the audit team will be required.

Question 16

PA is comparing the liabilities section of ABC Ltd.from last year to this year.Last year,ABC Ltd.had large loans due to major shareholders and officers and to one bank.This year,the debt has been reorganized so there are now two different banks used for loans.Instead of having debt to shareholders and officers,the company now owes notes to 25 different foreign investors,who are entitled to convert the debt to shares if interest is not paid or if principal installments are not paid on time.For this year's audit,how will the change in debt structure affect the audit risk model?

Accepted Answer

A) no effect on the audit risk model 
B) higher control risk 
C) lower acceptable audit risk 
D) higher acceptable audit risk 
A) no effect on the audit risk model 
B) higher control risk 
C) lower acceptable audit risk 
D) higher acceptable audit risk

Question 17

Which of the following is a factor that relates to "incentives or pressures" to commit fraudulent financial reporting?

Accepted Answer

A) significant accounting estimates involving subjective judgments 
B) excessive pressure for management to meet debt covenant requirements 
C) management's practice of making overly achievable forecasts 
D) high turnover of accounting,internal audit,and information technology staff 
A) significant accounting estimates involving subjective judgments 
B) excessive pressure for management to meet debt covenant requirements 
C) management's practice of making overly achievable forecasts 
D) high turnover of accounting,internal audit,and information technology staff

Question 18

Auditors' responsibility relating to fraud risk is

Accepted Answer

A) detecting any type of fraud that occurred during the reporting period. 
B) detecting fraud only if it is above the planning materiality level. 
C) not an issue because the auditor is not responsible for detecting fraud. 
D) making inquiries of management about fraud and considering fraud risks. 
A) detecting any type of fraud that occurred during the reporting period. 
B) detecting fraud only if it is above the planning materiality level. 
C) not an issue because the auditor is not responsible for detecting fraud. 
D) making inquiries of management about fraud and considering fraud risks.

Question 19

Because control risk and inherent risk vary from cycle to cycle,account to account,or objective to objective,

Accepted Answer

A) acceptable audit risk must also change. 
B) planned detection risk and required audit evidence will also vary. 
C) planned detection risk will vary but audit evidence will remain constant. 
D) planned detection risk will remain constant but audit evidence will vary. 
A) acceptable audit risk must also change. 
B) planned detection risk and required audit evidence will also vary. 
C) planned detection risk will vary but audit evidence will remain constant. 
D) planned detection risk will remain constant but audit evidence will vary.

Question 20

Your firm has been appointed as the auditor of Bush Mining Inc.(BMI),a company that runs small mining operations in remote areas of northern Canada,primarily in surface mines.You have been assigned the job of senior auditor for BMI.
BMI's operations are subject to provincial and federal laws and regulations.These laws and regulations have become stricter in recent years and some of BMI's older mines may be in violation of environmental laws.Surface mining produces tailings (toxic wastes that are dangerous to animal and plant life).These tailings are either further processed and buried or retained in tailings ponds.BMI is required to restore the mining property to a safe condition after a mine is exhausted.BMI has programs in place to monitor and control pollutants that are released to the air and to local waterways.
Required:A)What factors would affect the client business risk of BMI? Based upon your assessment of BMI's client business risk,would you adjust acceptable audit risk? Why or why not? B)What is your preliminary assessment of acceptable audit risk? Justify your answer.

Accepted Answer

A)The factors that affect business risk

If inherent risk is considered at the assertion level,why does the nature of the client's business affect inherent risk?

Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit function.An effective auditor will

What audit procedure would be an auditor's response to address management override of controls ?

Senior managers of Mega Corp.are entitled to receive large bonuses if they achieve earnings targets.What is the effect of this on the risks associated with recording of revenue?

As the effectiveness of internal control increases,what happens to control risk?

As per CAS 240,when an auditor inquires about the risk of fraud and errors within the organization,what are the auditors not required to discuss with management?

Fraud risk factors are examples of factors that increase the risk of fraud.Which of the following is an example of a management "incentives or pressures" risk factor?

PA is auditing a client where the accounts receivable are in worse shape than last year: many accounts are significantly overdue.How would this fact be dealt with in the audit risk model?

Which of the following would be a signal of possible problems with management integrity?

A PA recently finished the audit of a family-owned business.Now she is working on a large client with about 50 times the assets and 30 times total revenue.For the larger client,the PA will likely have

An inherent risk (IR)of 40% and a control risk (CR)of 60% affect detection risk and planned evidence differently than an

If from last year to the current year's audit,inherent risk has stayed constant but control risk is higher (it is more likely that controls do not detect material errors),what is the likely effect on detection risk?

The audit risk model is used primarily

All other factors held constant,if the auditor decreases acceptable audit risk then

Which of the following is a factor that relates to "incentives or pressures" to commit fraudulent financial reporting?

Auditors' responsibility relating to fraud risk is

Because control risk and inherent risk vary from cycle to cycle,account to account,or objective to objective,

The Demand for Audit and Other Assurance Services

The Public Accounting Profession and Audit Quality

Professional Ethics and Legal Liability

Audit Responsibilities and Objectives

Audit Evidence

Client Acceptance,Planning,and Materiality

Internal Control and COSO Framework

Assessing Control Risk and Designing Test of Controls

Develop Risk Response: Audit Strategy and Audit Program

Audit Sampling Concepts

Audit of the Revenue Cycle

Audit of the Acquisition and Payment Cycle

Audit of the Inventory and Distribution Cycle

Audit of the Human Resources and Payroll Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash Balances

Completing the Audit

Audit Reports on Financial Statements

Other Assurance and Nonassurance Services

Filters

Exam 7: Assessing the Risk of Material Misstatement

If inherent risk is considered at the assertion level,why does the nature of the client's business affect inherent risk?

Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit function.An effective auditor will

What audit procedure would be an auditor's response to address management override of controls ?

Senior managers of Mega Corp.are entitled to receive large bonuses if they achieve earnings targets.What is the effect of this on the risks associated with recording of revenue?

As the effectiveness of internal control increases,what happens to control risk?

As per CAS 240,when an auditor inquires about the risk of fraud and errors within the organization,what are the auditors not required to discuss with management?

Fraud risk factors are examples of factors that increase the risk of fraud.Which of the following is an example of a management "incentives or pressures" risk factor?

PA is auditing a client where the accounts receivable are in worse shape than last year: many accounts are significantly overdue.How would this fact be dealt with in the audit risk model?

Which of the following would be a signal of possible problems with management integrity?

A PA recently finished the audit of a family-owned business.Now she is working on a large client with about 50 times the assets and 30 times total revenue.For the larger client,the PA will likely have

An inherent risk (IR)of 40% and a control risk (CR)of 60% affect detection risk and planned evidence differently than an

If from last year to the current year's audit,inherent risk has stayed constant but control risk is higher (it is more likely that controls do not detect material errors),what is the likely effect on detection risk?

The audit risk model is used primarily

All other factors held constant,if the auditor decreases acceptable audit risk then

Which of the following is a factor that relates to "incentives or pressures" to commit fraudulent financial reporting?

Auditors' responsibility relating to fraud risk is

Because control risk and inherent risk vary from cycle to cycle,account to account,or objective to objective,

The Demand for Audit and Other Assurance Services

The Public Accounting Profession and Audit Quality

Professional Ethics and Legal Liability

Audit Responsibilities and Objectives

Audit Evidence

Client Acceptance,Planning,and Materiality

Internal Control and COSO Framework

Assessing Control Risk and Designing Test of Controls

Develop Risk Response: Audit Strategy and Audit Program

Audit Sampling Concepts

Audit of the Revenue Cycle

Audit of the Acquisition and Payment Cycle

Audit of the Inventory and Distribution Cycle

Audit of the Human Resources and Payroll Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash Balances

Completing the Audit

Audit Reports on Financial Statements

Other Assurance and Nonassurance Services

Filters