Question 1

Decisions involving the proper application of GAAP primarily involve which management assertion? Give some examples.

Accepted Answer

The valuation and allocation assertion o

Question 2

The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor ________.

Accepted Answer

A)  obtains reasonable assurance about whether the financial statements are free of material misstatement 
B)  assesses the accounting principles used and also evaluates the overall financial statement presentation 
C)  realizes some matters, either individually or in the aggregate, are important while other matters are not important 
D)  is responsible for expressing an opinion on the financial statements, which are the responsibility of management 
A)  obtains reasonable assurance about whether the financial statements are free of material misstatement 
B)  assesses the accounting principles used and also evaluates the overall financial statement presentation 
C)  realizes some matters, either individually or in the aggregate, are important while other matters are not important 
D)  is responsible for expressing an opinion on the financial statements, which are the responsibility of management

Question 3

Three key management assertions about items on the balance sheet are ________.

Accepted Answer

A)  occurrence, completeness, and accuracy 
B)  classification, existence, and cut-off 
C)  confirmation, presentation, and disclosure 
D)  existence, completeness, and presentation 
A)  occurrence, completeness, and accuracy 
B)  classification, existence, and cut-off 
C)  confirmation, presentation, and disclosure 
D)  existence, completeness, and presentation

Question 4

An auditor might suspect that the auditee is in financial difficulty if ________.

Accepted Answer

A)  the auditee offers more generous customer credit terms 
B)  the auditee takes a large bank loan at market rates 
C)  sales increase and inventory increases 
D)  purchases increase and payables increase 
A)  the auditee offers more generous customer credit terms 
B)  the auditee takes a large bank loan at market rates 
C)  sales increase and inventory increases 
D)  purchases increase and payables increase

Question 5

Define control risk.

Accepted Answer

Control risk is the risk that

Question 6

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the ________.

Accepted Answer

A)  factors that raise doubts about the auditability of the financial statements 
B)  operating effectiveness of internal control policies and procedures 
C)  risk that material misstatements exist in the financial statements 
D)  possibility that the nature and extent of substantive tests may be reduced 
A)  factors that raise doubts about the auditability of the financial statements 
B)  operating effectiveness of internal control policies and procedures 
C)  risk that material misstatements exist in the financial statements 
D)  possibility that the nature and extent of substantive tests may be reduced

Question 7

Inherent risk and control risk differ from detection risk in that they ________.

Accepted Answer

A)  arise from the misapplication of auditing procedures 
B)  may be assessed in either quantitative or non-quantitative terms 
C)  exist independently of the financial statement audit 
D)  can be changed at the auditor's discretion 
A)  arise from the misapplication of auditing procedures 
B)  may be assessed in either quantitative or non-quantitative terms 
C)  exist independently of the financial statement audit 
D)  can be changed at the auditor's discretion

Question 8

The audit objective related to existence is to obtain evidence that the asset, liability or equity exists physically or legally.

Accepted Answer

A) True 
 B)False

Question 9

As control risk gets smaller, audit risk gets larger, assuming all other risks stay constant.

Accepted Answer

A) True 
 B)False

Question 10

Risk should not be tolerated on a cost-benefit basis.

Accepted Answer

A) True 
 B)False

Question 11

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would ________.

Accepted Answer

A)  decrease substantive testing 
B)  decrease detection risk 
C)  increase inherent risk 
D)  increase materiality levels 
A)  decrease substantive testing 
B)  decrease detection risk 
C)  increase inherent risk 
D)  increase materiality levels

Question 12

The probability that an auditor will give an inappropriate opinion on the financial statements best describes ________.

Accepted Answer

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

Question 13

What is inherent risk?

Accepted Answer

A)  The probability that some accounts are more susceptible to misstatement than others. 
B)  The probability that the client's internal control policies and procedures will fail to detect material misstatements. 
C)  The probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements. 
D)  The probability that the auditor may not detect material misstatements in the financial statements. 
A)  The probability that some accounts are more susceptible to misstatement than others. 
B)  The probability that the client's internal control policies and procedures will fail to detect material misstatements. 
C)  The probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements. 
D)  The probability that the auditor may not detect material misstatements in the financial statements.

Question 14

Detection risk is the probability that audit procedures will produce evidence of material misstatements.

Accepted Answer

A) True 
 B)False

Question 15

Auditors do not create or control inherent risk; they can only try to assess its magnitude.

Accepted Answer

A) True 
 B)False

Question 16

An organization with a very hierarchical structure is typical of companies in complex business environments as this structure reduces the ability of a junior employee to make a wrong decision.

Accepted Answer

A) True 
 B)False

Question 17

The acceptable level of detection risk is inversely related to the ________.

Accepted Answer

A)  assurance provided by substantive tests 
B)  risk of misapplying auditing procedures 
C)  preliminary judgment about materiality levels 
D)  risk of failing to discover material misstatements 
A)  assurance provided by substantive tests 
B)  risk of misapplying auditing procedures 
C)  preliminary judgment about materiality levels 
D)  risk of failing to discover material misstatements

Question 18

There are two parts to business risk analysis: process analysis and industry analysis.

Accepted Answer

A) True 
 B)False

Question 19

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement actually does exist is ________.

Accepted Answer

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

Question 20

Can an auditor place complete reliance on internal control to the exclusion of other audit procedures? Explain your answer using the audit risk model.

Accepted Answer

An auditor cannot place complete relianc

Exam 6: Assessing Risks in an Audit Engagement

Decisions involving the proper application of GAAP primarily involve which management assertion? Give some examples.

The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor ________.

Three key management assertions about items on the balance sheet are ________.

An auditor might suspect that the auditee is in financial difficulty if ________.

Define control risk.

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the ________.

Inherent risk and control risk differ from detection risk in that they ________.

The audit objective related to existence is to obtain evidence that the asset, liability or equity exists physically or legally.

As control risk gets smaller, audit risk gets larger, assuming all other risks stay constant.

Risk should not be tolerated on a cost-benefit basis.

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would ________.

The probability that an auditor will give an inappropriate opinion on the financial statements best describes ________.

What is inherent risk?

Detection risk is the probability that audit procedures will produce evidence of material misstatements.

Auditors do not create or control inherent risk; they can only try to assess its magnitude.

An organization with a very hierarchical structure is typical of companies in complex business environments as this structure reduces the ability of a junior employee to make a wrong decision.

The acceptable level of detection risk is inversely related to the ________.

There are two parts to business risk analysis: process analysis and industry analysis.

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement actually does exist is ________.

Can an auditor place complete reliance on internal control to the exclusion of other audit procedures? Explain your answer using the audit risk model.

Introduction to Auditing

Auditors Professional Roles and Responsibilities

Auditors Ethical and Legal Responsibilities

Reports on Audited Financial Statements

Preliminary Audit Planning: Understanding the Auditees Business

Internal Control Over Financial Reporting

Audit Evidence and Assurance

Control Assessment and Testing

Audit Sampling

The Revenues, Receivables, and Receipts Process and Cash Account Balance

The Purchases, Payables, and Payments Process

Payroll and Production Processes

The Finance and Investment Process

Completing the Audit Work

Applying Professional Judgment to Form the Audit Opinion and Issue Theaudit Report

Other Public Accounting Services and Reportsreviews and Compilations

Professional Rules of Conduct Details and Auditor Responsibilities

Part I the Audit of Accounting Estimates: Basic Material Relating to Accountingestimates

Legal Liability Cases

Other Professional Accounting Services and Reports, Including Fraud

Filters