Question 1

Which of the following statements regarding inherent risk is correct?

Accepted Answer

A)  Inherent risk is unaffected by the auditor's experience with client's organization. 
B)  Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows that it was incorrect. 
C)  Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain more knowledge about the company. 
D)  Inherent risk is dependent upon the strengths in client's internal control system. 
A)  Inherent risk is unaffected by the auditor's experience with client's organization. 
B)  Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows that it was incorrect. 
C)  Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain more knowledge about the company. 
D)  Inherent risk is dependent upon the strengths in client's internal control system.

Question 2

The statement that the auditor plans to accumulate evidence that there is only a 5 percent acceptable audit risk of failing to uncover misstatements exceeding performance materiality of $250,000 is a precise and meaningful statement.

Accepted Answer

A) True 
 B)False

Question 3

Nonroutine transactions are unusual in nature but not infrequent in occurrence.

Accepted Answer

A) True 
 B)False

Question 4

To what extent do auditors typically rely on internal controls of their public company clients?

Accepted Answer

A)  extensively 
B)  only very little 
C)  infrequently 
D)  never 
A)  extensively 
B)  only very little 
C)  infrequently 
D)  never

Question 5

Nonroutine transactions may not necessarily increase the risk of material misstatement.

Accepted Answer

A) True 
 B)False

Question 6

As control risk increases, the amount of substantive evidence the auditor plans to accumulate should increase.

Accepted Answer

A) True 
 B)False

Question 7

There is a direct relationship between acceptable audit risk and planned detection risk.

Accepted Answer

A) True 
 B)False

Question 8

The risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality levels is

Accepted Answer

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

Question 9

If an auditor believes the client will have financial difficulties after the audit report is issued, and external users will be relying heavily on the financial statements, the auditor will probably set acceptable audit risk as low.

Accepted Answer

A) True 
 B)False

Question 10

Risk assessment procedures include

Accepted Answer

A)  a required discussion among the staff members of the audit and the client regarding material misstatements in the financial statement. 
B)  determination of the type of audit opinion to issue. 
C)  observation of the entity's operations. 
D)  assessing acceptable audit risk. 
A)  a required discussion among the staff members of the audit and the client regarding material misstatements in the financial statement. 
B)  determination of the type of audit opinion to issue. 
C)  observation of the entity's operations. 
D)  assessing acceptable audit risk.

Question 11

After assessing internal controls are being effective in the sales and collection cycle, the auditor can assume that internal controls will be effective at each of the client's other transaction cycles.

Accepted Answer

A) True 
 B)False

Question 12

Performance materiality does not affect any of the four risks to planned audit evidence.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following will generally be considered a significant risk?

Accepted Answer

A)  a sale to a customer 
B)  the determination of the amount of bad debt expense 
C)  the purchase of inventory 
D)  obtaining a loan from the bank 
A)  a sale to a customer 
B)  the determination of the amount of bad debt expense 
C)  the purchase of inventory 
D)  obtaining a loan from the bank

Question 14

The audit risk model that must be used for planning audit procedures and evaluating audit results is:
   = AAR.

Accepted Answer

A) True 
 B)False

Question 15

Revenue transactions and account balances subject to significant risk are not required to be documented in the working papers if the auditor determines significant risk does not apply in a particular audit engagement.

Accepted Answer

A) True 
 B)False

Question 16

Audit reports contain the phrase obtain reasonable assurance, which is intended to inform users that auditors do not guarantee or ensure the fair presentation of the financial statements which the audit reports cover.

Accepted Answer

A) True 
 B)False

Question 17

Auditors respond to risk primarily by I. changing the extent of testing.
II) changing the types of audit procedures.

Accepted Answer

A)  I only 
B)  II only 
C)  both I and II 
D)  neither I nor II 
A)  I only 
B)  II only 
C)  both I and II 
D)  neither I nor II

Question 18

Audit assurance is the complement of planned detection risk, that is, one minus planned detection risk.

Accepted Answer

A) True 
 B)False

Question 19

If an auditor believes the chance of financial failure is high and there is a corresponding increase in business risk for the auditor, acceptable audit risk would likely

Accepted Answer

A)  be reduced. 
B)  be increased. 
C)  remain the same. 
D)  be calculated using a computerized statistical package. 
A)  be reduced. 
B)  be increased. 
C)  remain the same. 
D)  be calculated using a computerized statistical package.

Question 20

Using your knowledge of the relationships among acceptable audit risk, inherent risk, control risk, planned detection risk, performance materiality, and planned evidence, state the effect on planned evidence (increase or decrease) of changing each of the following factors, while the other factors remain unchanged.
1. an increase in acceptable audit risk ________
2. an increase in inherent risk ________
3. a decrease in control risk ________
4. an increase in planned detection risk ________
5. an increase in performance materiality ________

Accepted Answer

1. decrease
2. incre

Exam 9: Assessing the Risk of Material Misstatement

Which of the following statements regarding inherent risk is correct?

The statement that the auditor plans to accumulate evidence that there is only a 5 percent acceptable audit risk of failing to uncover misstatements exceeding performance materiality of $250,000 is a precise and meaningful statement.

Nonroutine transactions are unusual in nature but not infrequent in occurrence.

To what extent do auditors typically rely on internal controls of their public company clients?

Nonroutine transactions may not necessarily increase the risk of material misstatement.

As control risk increases, the amount of substantive evidence the auditor plans to accumulate should increase.

There is a direct relationship between acceptable audit risk and planned detection risk.

The risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality levels is

If an auditor believes the client will have financial difficulties after the audit report is issued, and external users will be relying heavily on the financial statements, the auditor will probably set acceptable audit risk as low.

Risk assessment procedures include

After assessing internal controls are being effective in the sales and collection cycle, the auditor can assume that internal controls will be effective at each of the client's other transaction cycles.

Performance materiality does not affect any of the four risks to planned audit evidence.

Which of the following will generally be considered a significant risk?

The audit risk model that must be used for planning audit procedures and evaluating audit results is: = AAR.

Revenue transactions and account balances subject to significant risk are not required to be documented in the working papers if the auditor determines significant risk does not apply in a particular audit engagement.

Audit reports contain the phrase obtain reasonable assurance, which is intended to inform users that auditors do not guarantee or ensure the fair presentation of the financial statements which the audit reports cover.

Auditors respond to risk primarily by I. changing the extent of testing. II) changing the types of audit procedures.

Audit assurance is the complement of planned detection risk, that is, one minus planned detection risk.

If an auditor believes the chance of financial failure is high and there is a corresponding increase in business risk for the auditor, acceptable audit risk would likely

The Demand for Audit and Other Assurance Services

The CPA Profession

Audit Reports

Professional Ethics

Legal Liability

Audit Responsibilities and Objectives

Audit Evidence

Audit Planning and Materiality

Fraud Auditing

Internal Control and Coso Framework

Assessing Control Risk and Reporting on Internal Controls

Overall Audit Strategy and Audit Program

Audit of the Sales and Collection Cycle: Tests of Controls

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling for Tests of Details of Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Audit of the Payroll and Personnel Cycle

Audit of the Inventory and Warehousing Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash and Financial Instruments

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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