Question 1

When an auditor allocates materiality to segments, then the materiality amount for different accounts under audit will

Accepted Answer

A)  potentially differ from each other. 
B)  require the same level of unanticipated misstatements. 
C)  require the same amount of audit work. 
D)  be the same for each account audited. 
A)  potentially differ from each other. 
B)  require the same level of unanticipated misstatements. 
C)  require the same amount of audit work. 
D)  be the same for each account audited.

Question 2

In addition to representing an assessment of whether a client's internal control is effective for preventing or detecting misstatements, control risk also represents the

Accepted Answer

A)  reliability of management in preventing or detecting fraud. 
B)  auditor's intention to rely on internal controls. 
C)  likelihood that the auditor will detect illegal acts. 
D)  possibility of collusion occurring between two employees. 
A)  reliability of management in preventing or detecting fraud. 
B)  auditor's intention to rely on internal controls. 
C)  likelihood that the auditor will detect illegal acts. 
D)  possibility of collusion occurring between two employees.

Question 3

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

Question 4

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 in an appropriate manner. 
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 in an appropriate manner.

Question 5

When external users place heavy reliance on the financial statements it is appropriate that

Accepted Answer

A)  audit risk be increased. 
B)  inherent risk be decreased. 
C)  inherent risk be increased. 
D)  audit risk be decreased. 
A)  audit risk be increased. 
B)  inherent risk be decreased. 
C)  inherent risk be increased. 
D)  audit risk be decreased.

Question 6

If an auditor were to calculate an estimate of the errors by direct projection from the sample to the population and found $7000 of net overstatement errors in a sample of $100 000 out of a total population of $900 000, the estimate of errors in the population is

Accepted Answer

A)  $6300. 
B)  $778. 
C)  $63 000. 
D)  $77 778. 
A)  $6300. 
B)  $778. 
C)  $63 000. 
D)  $77 778.

Question 7

When a different extent of evidence is needed for the various cycles, the difference is caused by

Accepted Answer

A)  errors in the client's accounting system. 
B)  the client's need to achieve an unqualified opinion. 
C)  the auditor's need to follow GAAS. 
D)  the auditor's expectations of errors and assessment of internal control. 
A)  errors in the client's accounting system. 
B)  the client's need to achieve an unqualified opinion. 
C)  the auditor's need to follow GAAS. 
D)  the auditor's expectations of errors and assessment of internal control.

Question 8

A) Discuss each of the six steps in applying materiality in an audit and identify the audit phase(s) in which each step is performed.
B) Discuss the three main factors that affect an auditor's preliminary judgment about materiality.

Accepted Answer

A)Step 1.Set materiality.This is the com

Question 9

The audit risk model is

Accepted Answer

A)  a planning, testing, and evaluation model. 
B)  useful in planning but of limited value in evaluating results. 
C)  useful in evaluating results but of limited use in planning. 
D)  useful when performing the tests of balances, but of little value in either the planning or evaluation stages. 
A)  a planning, testing, and evaluation model. 
B)  useful in planning but of limited value in evaluating results. 
C)  useful in evaluating results but of limited use in planning. 
D)  useful when performing the tests of balances, but of little value in either the planning or evaluation stages.

Question 10

Assessing design effectiveness and conducting tests of controls are required when the auditor

Accepted Answer

A)  chooses to set control risk below 100 percent and relies on the controls. 
B)  chooses to set control risk below 100 percent even if there is no reliance placed on controls. 
C)  is planning the audit. 
D)  tests the design effectiveness. 
A)  chooses to set control risk below 100 percent and relies on the controls. 
B)  chooses to set control risk below 100 percent even if there is no reliance placed on controls. 
C)  is planning the audit. 
D)  tests the design effectiveness.

Question 11

Silka is in the process of performing an audit. During the audit, Silka decided to change materiality. A valid reason for this would be

Accepted Answer

A)  a new user of the financial statemens was identified. 
B)  a fraud was discovered in the accounts payable section. 
C)  materiality required the auditors to perform too many tests. 
D)  too many errors were found during testing. 
A)  a new user of the financial statemens was identified. 
B)  a fraud was discovered in the accounts payable section. 
C)  materiality required the auditors to perform too many tests. 
D)  too many errors were found during testing.

Question 12

PA has set audit risk at 5% and determined that inherent risk and control risk is at 100%. What is the detection risk?

Accepted Answer

A)  5% 
B)  50% 
C)  95% 
D)  20% 
A)  5% 
B)  50% 
C)  95% 
D)  20%

Question 13

Audit risk is a measure of

Accepted Answer

A)  the auditor's assessment of the likelihood that a material misstatement might occur in the first place. 
B)  the probability that the financial statements contain errors. 
C)  how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed. 
D)  the probability that errors in the financial statements that were not detected by the internal controls of the firm are not detected by the auditor. 
A)  the auditor's assessment of the likelihood that a material misstatement might occur in the first place. 
B)  the probability that the financial statements contain errors. 
C)  how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed. 
D)  the probability that errors in the financial statements that were not detected by the internal controls of the firm are not detected by the auditor.

Question 14

Which of the following describes the components of the audit risk model that are used to describe the risk of material misstatement (RMM)?

Accepted Answer

A)  AR / DR 
B)  IR × CR 
C)  IR × DR 
D)  CR × DR 
A)  AR / DR 
B)  IR × CR 
C)  IR × DR 
D)  CR × DR

Question 15

An important role of inherent risk assessment during the audit process is the need to

Accepted Answer

A)  document the quality of the disaster recovery plan. 
B)  attempt to predict where misstatements are most and least likely in the financial statement segments. 
C)  train the audit staff to assess the integrity of management. 
D)  increase the level of analytical review. 
A)  document the quality of the disaster recovery plan. 
B)  attempt to predict where misstatements are most and least likely in the financial statement segments. 
C)  train the audit staff to assess the integrity of management. 
D)  increase the level of analytical review.

Question 16

Below are four situations that involve the audit risk model as it is used for planning audit evidence requirements in the audit of inventory. For each situation, calculate planned detection risk.
SITUATION
 $$\begin{array} { | l | l | l | l | l | } 
\hline & 1 & 2 & 3 & 4 \
\hline \text { Audit risk } & 1 \% & 10 \% & 10 \% & 5 \% \
\hline \text { Inherent risk } & 100 \% & 100 \% & 50 \% & 20 \% \
\hline \text { Control risk } & 100 \% & 100 \% & 40 \% & 30 \% \
\hline \text { Detection risk } & & & & \
\hline
\end{array}$$

Accepted Answer

1.1%
2.10%

Question 17

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 audit risk? Why or why not?
B) What is your preliminary assessment of audit risk? Justify your answer.

Accepted Answer

A)The factors that affect business risk

Question 18

You generally consider your audit client's management to be honest. However, they do have a bias towards wanting to understate their income to lower income taxes. How would this bias be implemented in the audit risk model?

Accepted Answer

A)  reduce audit risk and reduce inherent risk 
B)  increase audit risk and reduce inherent risk 
C)  reduce audit risk and increase inherent risk 
D)  increase audit risk and increase inherent risk 
A)  reduce audit risk and reduce inherent risk 
B)  increase audit risk and reduce inherent risk 
C)  reduce audit risk and increase inherent risk 
D)  increase audit risk and increase inherent risk

Question 19

If detection risk is reduced, the amount of evidence the auditor accumulates will

Accepted Answer

A)  increase. 
B)  decrease. 
C)  remain unchanged. 
D)  be indeterminate. 
A)  increase. 
B)  decrease. 
C)  remain unchanged. 
D)  be indeterminate.

Question 20

The auditor set audit risk at 5%, inherent risk at 100%, and control risk at 50%, and determined a detection risk of 10%. If control risk had been 80%, detection risk would be about

Accepted Answer

A)  16%. 
B)  10%. 
C)  6%. 
D)  5%. 
A)  16%. 
B)  10%. 
C)  6%. 
D)  5%.

When an auditor allocates materiality to segments, then the materiality amount for different accounts under audit will

In addition to representing an assessment of whether a client's internal control is effective for preventing or detecting misstatements, control risk also represents the

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

When external users place heavy reliance on the financial statements it is appropriate that

If an auditor were to calculate an estimate of the errors by direct projection from the sample to the population and found $7000 of net overstatement errors in a sample of $100 000 out of a total population of $900 000, the estimate of errors in the population is

When a different extent of evidence is needed for the various cycles, the difference is caused by

A) Discuss each of the six steps in applying materiality in an audit and identify the audit phase(s) in which each step is performed. B) Discuss the three main factors that affect an auditor's preliminary judgment about materiality.

The audit risk model is

Assessing design effectiveness and conducting tests of controls are required when the auditor

Silka is in the process of performing an audit. During the audit, Silka decided to change materiality. A valid reason for this would be

PA has set audit risk at 5% and determined that inherent risk and control risk is at 100%. What is the detection risk?

Audit risk is a measure of

Which of the following describes the components of the audit risk model that are used to describe the risk of material misstatement (RMM)?

An important role of inherent risk assessment during the audit process is the need to

You generally consider your audit client's management to be honest. However, they do have a bias towards wanting to understate their income to lower income taxes. How would this bias be implemented in the audit risk model?

If detection risk is reduced, the amount of evidence the auditor accumulates will

The auditor set audit risk at 5%, inherent risk at 100%, and control risk at 50%, and determined a detection risk of 10%. If control risk had been 80%, detection risk would be about

The Demand for Audit and Other Assurance Services

The Public Accounting Profession and Audit Quality

Legal Liability

Professional Judgment and Ethics

Audit Responsibilities and Objectives

Client Acceptance and Planning the Audit

Internal Controls and Control Risk

Audit Evidence

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: Materiality and Risk

When an auditor allocates materiality to segments, then the materiality amount for different accounts under audit will

In addition to representing an assessment of whether a client's internal control is effective for preventing or detecting misstatements, control risk also represents the

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

When external users place heavy reliance on the financial statements it is appropriate that

If an auditor were to calculate an estimate of the errors by direct projection from the sample to the population and found $7000 of net overstatement errors in a sample of $100 000 out of a total population of $900 000, the estimate of errors in the population is

When a different extent of evidence is needed for the various cycles, the difference is caused by

A) Discuss each of the six steps in applying materiality in an audit and identify the audit phase(s) in which each step is performed. B) Discuss the three main factors that affect an auditor's preliminary judgment about materiality.

The audit risk model is

Assessing design effectiveness and conducting tests of controls are required when the auditor

Silka is in the process of performing an audit. During the audit, Silka decided to change materiality. A valid reason for this would be

PA has set audit risk at 5% and determined that inherent risk and control risk is at 100%. What is the detection risk?

Audit risk is a measure of

Which of the following describes the components of the audit risk model that are used to describe the risk of material misstatement (RMM)?

An important role of inherent risk assessment during the audit process is the need to

You generally consider your audit client's management to be honest. However, they do have a bias towards wanting to understate their income to lower income taxes. How would this bias be implemented in the audit risk model?

If detection risk is reduced, the amount of evidence the auditor accumulates will

The auditor set audit risk at 5%, inherent risk at 100%, and control risk at 50%, and determined a detection risk of 10%. If control risk had been 80%, detection risk would be about

The Demand for Audit and Other Assurance Services

The Public Accounting Profession and Audit Quality

Legal Liability

Professional Judgment and Ethics

Audit Responsibilities and Objectives

Client Acceptance and Planning the Audit

Internal Controls and Control Risk

Audit Evidence

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