Question 1

One major limitation in the application of the audit risk model is the difficulty of measuring the components of the model.

Accepted Answer

A) True 
 B)False

Question 2

If acceptable audit risk is low, and inherent risk and control risk are both low, then planned detection risk should be high.

Accepted Answer

A) True 
 B)False

Question 3

For well-planned audits, it is practical for auditors to provide assurances on immaterial amounts included in the financial statements.

Accepted Answer

A) True 
 B)False

Question 4

The application of professional skepticism consists of two primary components: a questioning mind and a critical assessment of the audit evidence obtained during the audit.

Accepted Answer

A) True 
 B)False

Question 5

An example of where the auditor will accept very low risk (low acceptable audit risk) is for an audit client having an initial public offering.

Accepted Answer

A) True 
 B)False

Question 6

Auditors are not allowed to make inquires of employees who are not considered management, such as marketing or sales personnel.

Accepted Answer

A) True 
 B)False

Question 7

In applying the audit risk model, auditors are concerned about overstatements, not understatements.

Accepted Answer

A) True 
 B)False

Question 8

Match between columns
                        Premises: a measure of the auditor's assessment of the likelihood that there are material misstatements before considering the effectiveness of internal control
a measure of the risk that audit evidence for a segment will fail to detect misstatements exceeding the performance materiality amount should such misstatements exist
a measure of the auditor's assessment of the likelihood that misstatements exceeding a performance materiality in a segment will not be prevented or detected by the client's internal controls
the magnitude of an omission or misstatement of accounting information that makes it probable that the judgment of a reasonable person would have been changed
This term is synonymous with acceptable audit risk.
a measure of how much risk the auditor is willing to take that the financial statements may be materially misstated after the audit is completed and an unqualified audit opinion has been issued
the materiality allocated to any given account balance
the maximum amount by which the auditor believes that the statements could be misstated and still not affect the decisions of reasonable users

Accepted Answer

The Answer of acceptable audit risk and materiality and control is...

Question 9

The most important element of the audit risk model is control risk.

Accepted Answer

A) True 
 B)False

Question 10

Risk assessment procedures include inquiries of management and others by the auditor. As part of these procedures, the auditor should talk to

Accepted Answer

A)  internal auditors. 
B)  board of directors. 
C)  individuals involved with regulatory compliance. 
D)  all of the above. 
A)  internal auditors. 
B)  board of directors. 
C)  individuals involved with regulatory compliance. 
D)  all of the above.

Question 11

Inherent risk and control risk exist independent of the audit of the financial statements.

Accepted Answer

A) True 
 B)False

Question 12

Describe the audit risk model and each of its components.

Accepted Answer

The planning form of the audit risk mode

Question 13

In assessing management integrity for potential new audit clients, the auditor should examine the prospective client's standing in the business community, financial stability, and relations with its previous CPA firm, among other procedures.

Accepted Answer

A) True 
 B)False

Question 14

Auditors begin their assessments of inherent risk during audit planning. Which of the following would not help in assessing inherent risk during the planning phase?

Accepted Answer

A)  obtaining client's agreement on the engagement letter 
B)  obtaining knowledge about the client's business and industry 
C)  touring the client's plant and offices 
D)  identifying related parties 
A)  obtaining client's agreement on the engagement letter 
B)  obtaining knowledge about the client's business and industry 
C)  touring the client's plant and offices 
D)  identifying related parties

Question 15

A planned detection risk (PDR) of .05 means the auditor plans to accumulate audit evidence until the risk of misstatement exceeding performance materiality is reduced to 5 percent.

Accepted Answer

A) True 
 B)False

Question 16

Planned detection risk I. determines the amount of substantive evidence the auditor plans to accumulate.
II) is dependent on inherent risk and business risk.

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 17

When assessing risk, it is important to remember that

Accepted Answer

A)  for acceptable audit risk, the SEC decides the risk the CPA firm should take for public clients. 
B)  inherent risk can be changed by the auditor. 
C)  detection risk can only be determined after audit risk, inherent risk, and control risk are determined. 
D)  control risk is determined by company management since they are responsible for internal control. 
A)  for acceptable audit risk, the SEC decides the risk the CPA firm should take for public clients. 
B)  inherent risk can be changed by the auditor. 
C)  detection risk can only be determined after audit risk, inherent risk, and control risk are determined. 
D)  control risk is determined by company management since they are responsible for internal control.

Question 18

An auditor who audits a business cycle that has low inherent risk should

Accepted Answer

A)  increase the amount of audit evidence gathered. 
B)  assign more experienced staff to that area. 
C)  expand planning procedures. 
D)  do none of the above. 
A)  increase the amount of audit evidence gathered. 
B)  assign more experienced staff to that area. 
C)  expand planning procedures. 
D)  do none of the above.

Question 19

When dealing with audit risk,

Accepted Answer

A)  auditors cannot accept any level of risk in performing the audit function. 
B)  most risks that auditors encounter are relatively easy to measure. 
C)  the audit risk model is only used for classes of transactions. 
D)  the audit risk model helps the auditor to decide how much and what types of evidence to accumulate. 
A)  auditors cannot accept any level of risk in performing the audit function. 
B)  most risks that auditors encounter are relatively easy to measure. 
C)  the audit risk model is only used for classes of transactions. 
D)  the audit risk model helps the auditor to decide how much and what types of evidence to accumulate.

Question 20

Since the audit risk model is a planning model, it assists the auditor in evaluating results.

Accepted Answer

A) True 
 B)False

Exam 9: Assessing the Risk of Material Misstatement

One major limitation in the application of the audit risk model is the difficulty of measuring the components of the model.

If acceptable audit risk is low, and inherent risk and control risk are both low, then planned detection risk should be high.

For well-planned audits, it is practical for auditors to provide assurances on immaterial amounts included in the financial statements.

The application of professional skepticism consists of two primary components: a questioning mind and a critical assessment of the audit evidence obtained during the audit.

An example of where the auditor will accept very low risk (low acceptable audit risk) is for an audit client having an initial public offering.

Auditors are not allowed to make inquires of employees who are not considered management, such as marketing or sales personnel.

In applying the audit risk model, auditors are concerned about overstatements, not understatements.

The most important element of the audit risk model is control risk.

Risk assessment procedures include inquiries of management and others by the auditor. As part of these procedures, the auditor should talk to

Inherent risk and control risk exist independent of the audit of the financial statements.

Describe the audit risk model and each of its components.

In assessing management integrity for potential new audit clients, the auditor should examine the prospective client's standing in the business community, financial stability, and relations with its previous CPA firm, among other procedures.

Auditors begin their assessments of inherent risk during audit planning. Which of the following would not help in assessing inherent risk during the planning phase?

A planned detection risk (PDR) of .05 means the auditor plans to accumulate audit evidence until the risk of misstatement exceeding performance materiality is reduced to 5 percent.

Planned detection risk I. determines the amount of substantive evidence the auditor plans to accumulate. II) is dependent on inherent risk and business risk.

When assessing risk, it is important to remember that

An auditor who audits a business cycle that has low inherent risk should

When dealing with audit risk,

Since the audit risk model is a planning model, it assists the auditor in evaluating results.

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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