Question 1

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 2

Lauralye Leasing Limited (LLL) provides lease financing to companies and individuals for equipment other than automobiles. Leases on commercial signs make up 50% of total leases; computer and telecommunications equipment are 30%; and restaurant equipment makes up most of the remainder. LLL's customers arrange to buy new equipment from equipment dealers, then contact LLL to arrange lease financing.
LLL was founded over thirty years ago by Laura and Al Ye. It is now run by Mr. and Mrs. Ye's daughter, Betsy, who is the President of LLL. LLL owns a small building downtown, where the offices of the business are located. Unused office space is rented out to other commercial tenants.
Betsy was a classmate of yours at in university and you have kept loosely in touch over the years. This year, she moved LLL's audit to your firm (a local firm with five partners), after deciding that the firm her parents had hired many years ago did not really understand her business' needs.
LLL has a small loan that is used to cover blips in working capital. The company has two salespeople. Most loans are received from stores throughout the city with whom LLL has standing agreements. If customers require financing, they fill in an application and fax it to LLL for approval. LLL will reply within two business days.
The company has been profitable for many years. There are no extraordinary items in the current year's financial statements.
Selected financial information is as follows:
 $$\begin{array} { l r } 
\text { Current assets } & \$ 9910000 \
\text { Long term assets } & \$ 46500000 \
\text { Short term liabilities } & \$ 30700000 \
\text { Shareholders' equity } & \$ 25710000 \
\text { Revenue } & \$ 10200000 \
\text { Expenses } & \$ 5600000 \
\text { Income before tax } & \$ 4600000 \
\text { (and before bonus) } &
\end{array}$$ 
Required: 
A) Which base would you use to calculate materiality? Why?
B) Calculate materiality. Choose a specific number and explain why you chose that amount.

Accepted Answer

A)Normally, net income before taxes and

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

Question 4

In practice, auditors rarely assign numerical probabilities to inherent risk, control risk, or audit risk. It is more common to assess these risks as high, medium, or low. For each of the four situations below, fill in the blanks for detection risk and the amount of evidence you would plan to gather ("planned evidence") using the terms high, medium, or low.
SITUATION
 $$\begin{array} { | l | l | l | l | l | } 
\hline & 1 & 2 & 3 & 4 \
\hline \text { Audit risk } & \text { Low } & \text { Low } & \text { High } & \text { High } \
\hline \text { Inherent risk } & \text { High } & \text { Low } & \text { Low } & \text { Low } \
\hline \text { Control risk } & \text { High } & \text { Low } & \text { Medium } & \text { Low } \
\hline \text { Detection risk } & & & & \
\hline \begin{array} { l } 
\text { Planned } \
\text { evidence }
\end{array} & & & & \
\hline
\end{array}$$

Accepted Answer

1.low, high
2.medium

Question 5

A PA is working on the audit of a publicly held corporation. At what level will the auditor likely set audit risk?

Accepted Answer

A)  low 
B)  medium 
C)  high 
D)  very high 
A)  low 
B)  medium 
C)  high 
D)  very high

Question 6

Materiality should be adjusted for the effect of net anticipated misstatements to determine performance materiality available for

Accepted Answer

A)  identified misstatements. 
B)  likely misstatements. 
C)  unanticipated misstatements. 
D)  further possible misstatements. 
A)  identified misstatements. 
B)  likely misstatements. 
C)  unanticipated misstatements. 
D)  further possible misstatements.

Question 7

Mugsy Brights Limited (MBL) is a private company in Winnipeg that sells mugs, jars, and bottles in a variety of colours, sizes, and materials. MBL has been owned by four equal owners since its inception. The owners have different skills-creative design, marketing, finance, and information systems. The company attributes much of its success to the use of materials that can be easily shipped without breaking, and unique designs that appeal to a variety of buyers, particularly commercial buyers who purchase for restaurants, or for businesses who choose to advertise their business by giving away or selling regular or travel mugs.
The owners meet formally every month and have informal meetings two or three times per week to discuss particular clients or new approaches. About a quarter of the company's sales are completed via the company's secure website, while the remainder are by telephone or purchase order. MBL works with distributors of kitchenware, selling wholesale to hundreds of outlets in Canada. Most of these sales are done over the phone, although a salesperson does spend some time in major cities across the country visiting some of the large customers and helping with shelf layout and marketing to the ultimate consumers for larger distributors. These efforts have resulted in gradually increasing market share for the company.
All sales are recorded in the accounting software package used by the company. The accounting manager reports directly to one of the owners, and there are two other employees in the accounting department. Password controls are used to limit functions that are accessible by employees. For example, only the controller can implement wage rate increases or product price increases (which are reviewed and approved by the owner responsible for marketing). Two owners are required to sign cheques, and do so with source documents attached. Similarly, two owners are required to approve new employees.
All manufacturing is outsourced to local producers who work with different materials. For example, a different supplier handles steel mugs versus plastics or glass. Ceramics are rarely used as they are quite breakable, whereas some forms of glass are very durable. MBL does not hold any inventory, as manufacturing is all done to order. However, as there have been some collection problems from customers, the company has had to go to the maximum of its line of credit and has no additional borrowing capacity available. It is waiting for the results of the audited financial statements to approach its bank for an increase in its line of credit.
Internet sales are prepared (via credit card), while sales to distributors are net thirty. The company has an April year end. Following are extracts from the annual financial statements.
 $$\begin{array} { l r r r } 
& \underline { 2015 } & \underline { 2014 } & \underline { \mathbf { 2 0 1 3 } } \
\text { Cash } & \$ 99000 & \$ 110000 & \$ 124000 \
\text { Accounts receivable } & \$ 320000 & \$ 220000 & \$ 150000 \
\text { Fixed assets (net) } & \$ 15000 & \$ 20000 & \$ 25000 \
& & & \
\text { Accounts payable } & \$ 270000 & \$ 180000 & \$ 150000 \
\text { Bank indebtedness } & \$ 100000 & \$ 25000 & \$ 0 \
\text { Share capital } & \$ 200000 & \$ 200000 & \$ 200000 \
\text { Revenue } & & & \
\text { Cost of sales } & \$ 625310 & \$ 538120 & \$ 507380 \
\text { Administration expenses } & \$ 89000 & \$ 57000 & \$ 58000 \
\text { Sales expenses } & \$ 31266 & \$ 21525 & \$ 20295 \
\text { Amortization } & \$ 5000 & \$ 5000 & \$ 5000
\end{array}$$ 
Required: 
A) What audit risk would you assign to the company? Why? [Tip: Do some calculations and consider client business risk.]
B) Calculate preliminary materiality. Justify your decision of materiality base and choice of materiality.

Accepted Answer

A)
 \[\begin{array} { l c c c } 
& \frac

Question 8

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 9

Audit risk is ordinarily set by the auditor during planning and

Accepted Answer

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

Question 10

What is the role of internal controls during the assessment of inherent risk?

Accepted Answer

A)  Internal controls are considered separately, so they are ignored during the assessment of inherent risk. 
B)  As the quality of internal controls increases, inherent risk decreases. 
C)  As the quality of internal controls improves, inherent risk increases. 
D)  There is a direct relationship between the quality of internal controls and inherent risk. 
A)  Internal controls are considered separately, so they are ignored during the assessment of inherent risk. 
B)  As the quality of internal controls increases, inherent risk decreases. 
C)  As the quality of internal controls improves, inherent risk increases. 
D)  There is a direct relationship between the quality of internal controls and inherent risk.

Question 11

Further possible misstatement considers

Accepted Answer

A)  possible presence of management fraud. 
B)  possible lack of knowledge of the audit team. 
C)  imprecision in the sampling process. 
D)  imprecision in the audit procedures. 
A)  possible presence of management fraud. 
B)  possible lack of knowledge of the audit team. 
C)  imprecision in the sampling process. 
D)  imprecision in the audit procedures.

Question 12

CAS 320 (materiality in planning and performing an audit) defines materiality in terms of three key concepts. The first and second concepts are that a material misstatement should be considered in the context of knowledgeable users and the effect on decision making; and that material is relative to circumstances surrounding the decision and nature of the information. The third concept is

Accepted Answer

A)  that the auditor should consider users of financial statements as a group. 
B)  that the auditor should consider users of financial statements individually. 
C)  that the users should be informed and approve of the materiality used by the auditor. 
D)  that the auditor should be conservative in setting the materiality level. 
A)  that the auditor should consider users of financial statements as a group. 
B)  that the auditor should consider users of financial statements individually. 
C)  that the users should be informed and approve of the materiality used by the auditor. 
D)  that the auditor should be conservative in setting the materiality level.

Question 13

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

Accepted Answer

A)  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)  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 14

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.

Question 15

The inherent risks of programming errors with resulting data loss increases when

Accepted Answer

A)  packaged software is used that has to be updated every year. 
B)  complex configurations such as ERP at multiple locations are used. 
C)  functional systems are used (such as separate systems for sales and payroll). 
D)  sequential file systems are used rather than database management systems. 
A)  packaged software is used that has to be updated every year. 
B)  complex configurations such as ERP at multiple locations are used. 
C)  functional systems are used (such as separate systems for sales and payroll). 
D)  sequential file systems are used rather than database management systems.

Question 16

The auditors have decided upon a materiality level of $100 000 for their audit of ABC Manufacturing. Which one of the following errors would be considered more important by the auditors?

Accepted Answer

A)  an error in accounts receivable cutoff of $50 000 
B)  an overstatement of accounts payable by $15 000 
C)  an error in allocation between accounts receivable and accounts payable by $75 000 
D)  an illegal payment of $15 000 
A)  an error in accounts receivable cutoff of $50 000 
B)  an overstatement of accounts payable by $15 000 
C)  an error in allocation between accounts receivable and accounts payable by $75 000 
D)  an illegal payment of $15 000

Question 17

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 18

The inherent risks of data compromise (such as privacy violations) or data loss increase when

Accepted Answer

A)  documents are sent by regular mail to confirm contract details. 
B)  information is encrypted using public key technology. 
C)  organizations use websites to process sales transactions. 
D)  packaged software is used to process sales transactions. 
A)  documents are sent by regular mail to confirm contract details. 
B)  information is encrypted using public key technology. 
C)  organizations use websites to process sales transactions. 
D)  packaged software is used to process sales transactions.

Question 19

Using the audit risk model, audit risk describes targeted assurance, while control risk and inherent risk are assessed based upon a variety of factors. Of the components of the audit risk model, which is most likely to be set to 100%?

Accepted Answer

A)  audit risk 
B)  control risk 
C)  detection risk 
D)  inherent risk 
A)  audit risk 
B)  control risk 
C)  detection risk 
D)  inherent risk

Question 20

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.

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

A PA is working on the audit of a publicly held corporation. At what level will the auditor likely set audit risk?

Materiality should be adjusted for the effect of net anticipated misstatements to determine performance materiality available for

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?

Audit risk is ordinarily set by the auditor during planning and

What is the role of internal controls during the assessment of inherent risk?

Further possible misstatement considers

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

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

The inherent risks of programming errors with resulting data loss increases when

The auditors have decided upon a materiality level of $100 000 for their audit of ABC Manufacturing. Which one of the following errors would be considered more important by the auditors?

The audit risk model is used primarily

The inherent risks of data compromise (such as privacy violations) or data loss increase when

Using the audit risk model, audit risk describes targeted assurance, while control risk and inherent risk are assessed based upon a variety of factors. Of the components of the audit risk model, which is most likely to be set to 100%?

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 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

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

A PA is working on the audit of a publicly held corporation. At what level will the auditor likely set audit risk?

Materiality should be adjusted for the effect of net anticipated misstatements to determine performance materiality available for

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?

Audit risk is ordinarily set by the auditor during planning and

What is the role of internal controls during the assessment of inherent risk?

Further possible misstatement considers

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

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

The inherent risks of programming errors with resulting data loss increases when

The auditors have decided upon a materiality level of $100 000 for their audit of ABC Manufacturing. Which one of the following errors would be considered more important by the auditors?

The audit risk model is used primarily

The inherent risks of data compromise (such as privacy violations) or data loss increase when

Using the audit risk model, audit risk describes targeted assurance, while control risk and inherent risk are assessed based upon a variety of factors. Of the components of the audit risk model, which is most likely to be set to 100%?

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 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