Question 1

Auditors respond to risk by:

Accepted Answer

A)  changing the extent of testing and type of audit procedures. 
B)  modifying the assessment of materiality. 
C)  increasing the amount of evidence collected. 
D)  all of the above 
A)  changing the extent of testing and type of audit procedures. 
B)  modifying the assessment of materiality. 
C)  increasing the amount of evidence collected. 
D)  all of the above

Question 2

If an auditor assigns a tolerable misstatement of $1 000 to accounts payable, he or she would need to obtain more audit evidence for that account than if $100 000 had been assigned.

Accepted Answer

A) True 
 B)False

Question 3

Materiality and risk are ________ concepts in planning the audit and designing an audit approach.

Accepted Answer

A)  reasonable 
B)  typical 
C)  optional 
D)  fundamental 
A)  reasonable 
B)  typical 
C)  optional 
D)  fundamental

Question 4

The definition of materiality indicates that both the users and the auditors of financial statements are
assumed to have knowledge of the likely preparers of the statements.

Accepted Answer

A) True 
 B)False

Question 5

Acceptable audit risk and planned detection risk are inversely related; i.e., as acceptable audit risk increases, planned detection risk should decrease, ceteris paribus.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is NOT a consideration when the auditor is attempting to assess the inherent risk?

Accepted Answer

A)  results of previous audits 
B)  existence of related parties 
C)  nature of client's business 
D)  frequency and intensity of top management's review of the accounting transactions and records 
A)  results of previous audits 
B)  existence of related parties 
C)  nature of client's business 
D)  frequency and intensity of top management's review of the accounting transactions and records

Question 7

The estimate for sampling error results because the auditor has sampled only a portion of the population.Sampling error represents the:

Accepted Answer

A)  minimum misstatements in accounts not audited. 
B)  maximum misstatements in accounts not audited. 
C)  maximum misstatements in the audited accounts. 
D)  minimum misstatements in the audited accounts. 
A)  minimum misstatements in accounts not audited. 
B)  maximum misstatements in accounts not audited. 
C)  maximum misstatements in the audited accounts. 
D)  minimum misstatements in the audited accounts.

Question 8

When there is a high degree of engagement risk, auditors can factor this into the audit risk model by:

Accepted Answer

A)  reducing the acceptable audit risk. 
B)  reducing the planned detection risk. 
C)  increasing the assessment of inherent risk. 
D)  all of the above 
A)  reducing the acceptable audit risk. 
B)  reducing the planned detection risk. 
C)  increasing the assessment of inherent risk. 
D)  all of the above

Question 9

Acceptable audit risk is ordinarily set by the auditor during planning and:

Accepted Answer

A)  varies by each major cycle and by each account. 
B)  holds constant for each major cycle and account. 
C)  varies by each major cycle but is constant by account. 
D)  holds constant for each major cycle but varies by account. 
A)  varies by each major cycle and by each account. 
B)  holds constant for each major cycle and account. 
C)  varies by each major cycle but is constant by account. 
D)  holds constant for each major cycle but varies by account.

Question 10

Auditors will vary the acceptable audit risk for each segment of the audit.

Accepted Answer

A) True 
 B)False

Question 11

The primary purpose of allocating the preliminary judgement about materiality to financial statement accounts is to help the auditor decide the appropriate evidence to accumulate for each account.

Accepted Answer

A) True 
 B)False

Question 12

A materiality level of $1 000 would require more audit evidence than would a materiality level of $100 000.

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

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

Question 14

Risk is:

Accepted Answer

A)  measured by tolerable error. 
B)  to be avoided in the audit. 
C)  a measure of uncertainty. 
D)  all of the above 
A)  measured by tolerable error. 
B)  to be avoided in the audit. 
C)  a measure of uncertainty. 
D)  all of the above

Question 15

There are several factors the auditor should consider when assessing inherent risk.Discuss four of these factors, and for each factor, explain the factor's effect on the auditor's assessment of inherent risk.

Accepted Answer

Factors the auditor should consider when

Question 16

Applying materiality in practice is:

Accepted Answer

A)  based on experience. 
B)  fairly simple. 
C)  straightforward. 
D)  different for each audit 
A)  based on experience. 
B)  fairly simple. 
C)  straightforward. 
D)  different for each audit

Question 17

Match between columns
                        Premises: an increase in acceptable audit risk __________
a decrease in control risk __________
an increase in tolerable misstatement __________
an increased in planned detection risk __________
an increase in inherent risk __________

Accepted Answer

The Answer of increase and decrease is...

Question 18

Which one of the following discoveries by the auditor would NOT raise the red flag of increased inherent risk?

Accepted Answer

A)  This is the fourth consecutive year that the firm has audited this client. 
B)  Client is a parent company with a subsidiary. 
C)  The client is an electronics manufacturer that is holding extensive inventory. 
D)  Review of the results of the previous year's audit shows there were significant misstatements in accounts payable. 
A)  This is the fourth consecutive year that the firm has audited this client. 
B)  Client is a parent company with a subsidiary. 
C)  The client is an electronics manufacturer that is holding extensive inventory. 
D)  Review of the results of the previous year's audit shows there were significant misstatements in accounts payable.

Question 19

When discussing acceptable audit risk (AAR)and the audit risk model, which one of the following statements is true?

Accepted Answer

A)  The terms audit assurance, overall assurance. and level of assurance are synonyms for AAR. 
B)  When the auditor decides on a lower acceptable audit risk, it means the auditor wants to be certain that the financial statements are not materially misstated. 
C)  AAR is the risk that the auditor is willing to take that the financial statements are fairly stated after the audit is completed and an unqualified opinion has been reached. 
D)  AAR is objectively determined by the auditor. 
A)  The terms audit assurance, overall assurance. and level of assurance are synonyms for AAR. 
B)  When the auditor decides on a lower acceptable audit risk, it means the auditor wants to be certain that the financial statements are not materially misstated. 
C)  AAR is the risk that the auditor is willing to take that the financial statements are fairly stated after the audit is completed and an unqualified opinion has been reached. 
D)  AAR is objectively determined by the auditor.

Question 20

Many account balances require estimates and/or a great deal of management judgement.One area that does NOT require such judgement would be:

Accepted Answer

A)  obsolete inventory. 
B)  liability for warranty payments. 
C)  interest expense. 
D)  allowance for uncollectible accounts. 
A)  obsolete inventory. 
B)  liability for warranty payments. 
C)  interest expense. 
D)  allowance for uncollectible accounts.

Auditors respond to risk by:

If an auditor assigns a tolerable misstatement of $1 000 to accounts payable, he or she would need to obtain more audit evidence for that account than if $100 000 had been assigned.

Materiality and risk are ________ concepts in planning the audit and designing an audit approach.

The definition of materiality indicates that both the users and the auditors of financial statements are assumed to have knowledge of the likely preparers of the statements.

Acceptable audit risk and planned detection risk are inversely related; i.e., as acceptable audit risk increases, planned detection risk should decrease, ceteris paribus.

Which of the following is NOT a consideration when the auditor is attempting to assess the inherent risk?

The estimate for sampling error results because the auditor has sampled only a portion of the population.Sampling error represents the:

When there is a high degree of engagement risk, auditors can factor this into the audit risk model by:

Acceptable audit risk is ordinarily set by the auditor during planning and:

Auditors will vary the acceptable audit risk for each segment of the audit.

The primary purpose of allocating the preliminary judgement about materiality to financial statement accounts is to help the auditor decide the appropriate evidence to accumulate for each account.

A materiality level of $1 000 would require more audit evidence than would a materiality level of $100 000.

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

Risk is:

There are several factors the auditor should consider when assessing inherent risk.Discuss four of these factors, and for each factor, explain the factor's effect on the auditor's assessment of inherent risk.

Applying materiality in practice is:

Which one of the following discoveries by the auditor would NOT raise the red flag of increased inherent risk?

When discussing acceptable audit risk (AAR)and the audit risk model, which one of the following statements is true?

Many account balances require estimates and/or a great deal of management judgement.One area that does NOT require such judgement would be:

Demand for audit and assurance services

Auditors’ legal environment

Audit quality and ethics

Audit responsibilities and objectives

Audit evidence

Audit planning and documentation

Internal control and control risk

Fraud auditing

The impact of information technology on the audit process

Overall audit plan and audit program

Audit of the sales and collection cycle: Tests of controls and substantive tests of transactions

Completing tests in the sales and collection cycle: Accounts receivable

Audit sampling

Audit of transaction cycles and financial statement balances I

Audit of transaction cycles and financial statement balances II

Completing the audit

Audit reporting

Other auditing and assurance engagements

Filters

Exam7: Materiality and risk

Auditors respond to risk by:

If an auditor assigns a tolerable misstatement of $1 000 to accounts payable, he or she would need to obtain more audit evidence for that account than if $100 000 had been assigned.

Materiality and risk are ________ concepts in planning the audit and designing an audit approach.

The definition of materiality indicates that both the users and the auditors of financial statements are assumed to have knowledge of the likely preparers of the statements.

Acceptable audit risk and planned detection risk are inversely related; i.e., as acceptable audit risk increases, planned detection risk should decrease, ceteris paribus.

Which of the following is NOT a consideration when the auditor is attempting to assess the inherent risk?

The estimate for sampling error results because the auditor has sampled only a portion of the population.Sampling error represents the:

When there is a high degree of engagement risk, auditors can factor this into the audit risk model by:

Acceptable audit risk is ordinarily set by the auditor during planning and:

Auditors will vary the acceptable audit risk for each segment of the audit.

The primary purpose of allocating the preliminary judgement about materiality to financial statement accounts is to help the auditor decide the appropriate evidence to accumulate for each account.

A materiality level of $1 000 would require more audit evidence than would a materiality level of $100 000.

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

Risk is:

There are several factors the auditor should consider when assessing inherent risk.Discuss four of these factors, and for each factor, explain the factor's effect on the auditor's assessment of inherent risk.

Applying materiality in practice is:

Which one of the following discoveries by the auditor would NOT raise the red flag of increased inherent risk?

When discussing acceptable audit risk (AAR)and the audit risk model, which one of the following statements is true?

Many account balances require estimates and/or a great deal of management judgement.One area that does NOT require such judgement would be:

Demand for audit and assurance services

Auditors’ legal environment

Audit quality and ethics

Audit responsibilities and objectives

Audit evidence

Audit planning and documentation

Internal control and control risk

Fraud auditing

The impact of information technology on the audit process

Overall audit plan and audit program

Audit of the sales and collection cycle: Tests of controls and substantive tests of transactions

Completing tests in the sales and collection cycle: Accounts receivable

Audit sampling

Audit of transaction cycles and financial statement balances I

Audit of transaction cycles and financial statement balances II

Completing the audit

Audit reporting

Other auditing and assurance engagements

Filters