Deck 3: Risk Assessment Part Iaudit Risk and Audit Strategy

Question 1

What is the first stage of any audit?

A)Client acceptance or a continuance decision
B)Risk assessment
C)Reporting
D)Risk response

Answer 1

Client acceptance or a continuance decision

Question 2

What happens if an independence threat appears to be insurmountable?

A)An audit firm should decline the offer to be the auditor of a prospective client or resign from the audit of an existing client.
B)The audit firm should contact the State Board of Accountancy so they can make a press release to discourage other accountants from taking the engagement.
C)The audit firm should make certain that safeguards are put in place to limit or remove those threats.
D)The audit firm should take the engagement and continue to make certain that safeguards are put in place to limit or remove those threats.

Answer 2

An audit firm should decline the offer to be the auditor of a prospective client or resign from the audit of an existing client.

Question 3

An engagement letter is prepared by the _______ and acknowledged by the _______ before the audit begins.

A)auditor; client
B)client; client
C)auditor; state government
D)federal government; client

Answer 3

auditor; client

Question 4

The requirement that the auditor have access to all information needed to perform the audit is stated in ________.

A)the engagement letter
B)substantive procedures
C)an audit strategy
D)AU-C 300 Planning an Audit

Question 5

The factor that influences client acceptance and retention decisions with respect to whether the accounting firm has the expertise to perform the services requested by the client is known as:

A)competence issues.
B)independence issues.
C)integrity of management.
D)special circumstances and unusual risk.

Question 6

Which of the following is a positive factor influencing client acceptance and retention decisions with respect to the integrity of management?

A)Management places a premium on representational faithfulness of accounting information.
B)Concerns exist about the integrity of management in business and accounting decisions.
C)Management is preoccupied with meeting specific accounting numbers.
D)Management integrity in business and accounting decisions seem to be situational and only remedied when noted by the auditors.

Question 7

An engagement letter is like a(an) _______.

A)contract
B)audit report
C)job application
D)note payable

Question 8

Which of the following is not a phase of the audit?

A)The risk continuance phase
B)The risk assessment phase
C)The risk response phase
D)The reporting phase

Question 9

Which of the following is true in the case of an auditor communicating with a continuing client in the beginning of a contract?

A)A new engagement letter is not needed if the terms of engagement remain unchanged
B)No reminder of the engagement terms is needed if no revisions are made to the engagement letter
C)No reminder of the engagement terms is needed if a continuance decision is made.
D)No engagement letter is needed in all cases of continuance decision.

Question 10

Which of the following is a positive factor influencing client acceptance and retention with respect to special circumstances and unusual risks?

A)There are minimal regulatory reporting requirements.
B)There are significant regulatory reporting requirements with close monitoring by regulators.
C)The client voices significant concerns about the scope of audit work.
D)The client is experiencing profitability issues, weak cash flows, and is close to violation of debt covenants.

Question 11

Which of the following would be considered as internal information gathered primarily about the integrity of client management?

A)Communication with client personnel
B)Communication with the client's bankers and lawyers
C)Communication with the client's industry peers
D)A review of articles in industry trade journals

Question 12

An engagement letter is prepared by an auditor and acknowledged by a client _______.

A)before the audit begins
B)after the audit is completed
C)before the client's year-end
D)after the interim report is issued

Question 13

The engagement letter does NOT include _______.

A)the requirement that the auditor have access to all social security numbers of client employees in order to perform background checks
B)an explanation of the scope of the audit
C)the timing of the completion of various aspects of the audit
D)an overview of the client's responsibility for the preparation of the financial statements

Question 14

If management is preoccupied with meeting specific accounting numbers, this is a negative factor that should influence client acceptance and retention and is associated with _______.

A)the integrity of management
B)competence issues within the audit firm
C)independence issues within the audit firm
D)special circumstances and unusual risks

Question 15

When is it necessary to send a new engagement letter to a continuing client?

A)Only when the terms of the engagement have changed.
B)Every year.
C)On a quarterly basis.
D)Along with the CPA's bill for the first year of services.

Question 16

As per the appendix to AU-C 210, Terms of Engagement, a typical engagement letter for a private company client begins with a paragraph on the ________.

A)objective and scope of the audit
B)responsibilities of the auditor
C)responsibilities of management
D)fee arrangements and billings

Question 17

Which of the following is/are the primary means of communication for gathering information while assessing management integrity?

A)communication with the previous auditor, only
B)communication with client personnel and with the client's industry peers, only
C)communication with the client's industry peers, only
D)communication with the client personnel, the client's industry peers and the previous auditor

Question 18

The main purpose of an engagement letter is to _______.

A)avoid any misunderstandings between the auditor and the client
B)advertise the additional services that the CPA firm provides
C)present the conclusion of the audit
D)request any and all information that the CPA firm might need to complete the audit

Question 19

Which of the following would be least likely to help you assess the integrity of management?

A)Interviews with human resources about its long-term disability provider.
B)Interviews about the reputation of the client, its management, directors, and key stakeholders with the previous auditor.
C)Interviews with management about its attitude to risk exposure.
D)Interviews with the prior auditor about the client's reasons for switching audit firms, if the company was previously audited.

Question 20

Which of the following was one of the largest accounting firms in the world during the 1990's and early 2000's?

A)Arthur Andersen
B)Laventhol & Horwath
C)Arthur Young & Co
D)Supreme, Inc.

Question 21

The new auditor should communicate with the previous auditor in order to _______.

A)gain an understanding about the reasons for the change of auditors
B)get all the passwords and logins to the client software
C)get the previous auditor's work papers
D)serve them with an official change of auditor notice

Question 22

Which of the following is performed during the risk assessment phase?

A)Risk and materiality assessment
B)Detailed tests of controls
C)Substantive testing of transactions and accounts
D)Drawing conclusions based upon the evidence gathered

Question 23

The auditor's opinion is expressed in the _______.

A)audit report
B)financial statement footnotes
C)retained earnings statement
D)risk response phase documentation

Question 24

Audit risk is best defined as the _______.

A)risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated
B)application of risk assessment procedures
C)element that helps form risk assessment
D)risk of noncompliance with laws and regulations

Question 25

If a company refuses permission to contact its previous audit firm, what should the new auditor do?

A)Consider the implications of that refusal when deciding whether to accept the engagement.
B)Contact potential third parties to gain information about the client firm.
C)Review newspaper and magazine articles about the client.
D)Do a background check on the CEO of the company.

Question 26

The final phase of the audit involves _______.

A)drawing conclusions based upon the evidence gathered and arriving at an opinion about the fair presentation of the financial statements
B)detailed testing of internal controls, transactions, account balances, and disclosures the auditors have determined to be at high risk of material misstatement
C)planning the audit by assessing risk to reduce audit risk to an acceptably low level
D)gaining an understanding of the client and identifying factors that may impact the risk of a material misstatement occurring in the financial statements

Question 27

Which phase helps improve the efficiency and effectiveness of the audit?

A)The risk assessment phase
B)The risk response phase
C)The reporting phase
D)The audit strategy phase

Question 28

Which overview defines audit strategy?

A)The determination of the amount of time to spend testing the client's internal controls and conducting detailed testing of transactions and account balances.
B)Gaining an understanding of the client, including identifying risk factors.
C)Performing tests of controls and detailed substantive testing of transactions and accounts.
D)Evaluation of results of the detailed testing in light of the auditor's understanding of the client and forming an opinion on the fair presentation of the client's financial statements.

Question 29

The risk assessment process is a(an) _______.

A)iterative process
B)one-time process
C)concluding process
D)infrequent process

Question 30

Which of the following processes is associated with the reporting phase?

A)Conclusions are drawn when testing the client's controls.
B)Decisions are made about extent and timing of detailed testing of account balances.
C)Risk assessment procedures are performed to ensure appropriate attention is paid to transactions.
D)Factors are identified that may impact the risk of a material misstatement.

Question 31

Auditors gather information through communication with individuals internal and external to the prospective client.Which of the following would be internal to the client?

A)Communication with client personnel
B)Communication with third parties
C)Communication with the client's industry peers
D)Communication with the previous auditor

Question 32

Auditors make preliminary risk assessments while _______.

A)planning the audit
B)drawing conclusions about client controls, transactions, and account balances
C)planning to rely on the client's system of internal controls
D)testing the account balances and transactions

Question 33

Performance of detailed tests of controls and substantive testing is typically accomplished in the ____________ phase of the audit.

A)risk response
B)audit strategy
C)reporting
D)risk assessment

Question 34

An evaluation of the results of the detailed testing in light of the auditor's understanding of the client and forming an opinion on the fair presentation of the client's financial statements is associated with what phase of the audit?

A)The reporting phase
B)The response phase
C)The risk assessment phase
D)The risk of material misstatement phase

Question 35

Developing an audit strategy is typically accomplished in the _______.

A)risk assessment phase
B)risk response phase
C)reporting phase
D)audit strategy phase

Question 36

Which of the following is a negative factor influencing client acceptance and retention with respect to competence issues?

A)The audit firm does not have the affiliation with specialists to meet client needs.
B)The client has a weak accounting system with few internal controls.
C)The audit firm has conflict of interest issues that cannot be resolved prior to client acceptance.
D)There are significant regulatory reporting requirements with close monitoring by regulators.

Question 37

Identification of risk factors is typically associated with what phase of the audit?

A)The risk assessment phase
B)The risk response phase
C)The reporting phase
D)The audit strategy phase

Question 38

What term refers to the determination of the amount of time to spend testing the client's internal controls and conducting detailed testing of transactions and account balances?

A)Audit strategy
B)Risk response
C)Reporting
D)Risk assessment

Question 39

The risk response phase involves the _______.

A)performance of detailed tests of controls and substantive testing
B)evaluation of the results of the detailed testing
C)performing of a risk and materiality assessment
D)development of an audit strategy

Question 40

Which of the following involves gaining an understanding of the client, identifying risk factors, developing an audit strategy, and setting planning materiality?

A)Risk assessment phase
B)Risk response phase
C)Substantive procedures
D)Tests of controls

Question 41

What is the last phase of the audit?

A)The reporting phase
B)The risk response phase
C)The audit strategy phase
D)The risk assessment phase

Question 42

From a definitional perspective, information is considered material if it _______.

A)impacts the decision-making process of users of the financial statements
B)is diverse in nature
C)only includes qualitative evidence
D)includes income statement benchmarks

Question 43

Information is considered quantitatively material if it _______.

A)exceeds the dollar magnitude of an auditor's planning materiality assessment
B)affects a user's decision-making process for a reason other than its dollar magnitude
C)indicates the audit client is in danger of breaching a debt covenant
D)indicates there is a change in client operations that affects the level of risk faced by the client

Question 44

What is the second phase of the audit?

A)The risk response phase
B)The reporting phase
C)The audit strategy phase
D)The risk assessment phase

Question 45

When considering clients like Boeing, inventory will most likely be the largest current asset and prepaid expenses will be one of the smallest.As a result, the auditors should plan to _______.

A)devote more audit time to the inventory account than the prepaid expenses account
B)devote more audit time to prepaid expenses to the inventory account
C)use more complex audit tests for inventory and more simple audit tests for prepaid expenses
D)observe more material misstatements in prepaid expenses due to timing differences as compared to the inventory account

Question 46

Auditors make decisions about the extent and timing of detailed testing of account balances and transactions during the ________phase of the audit.

A)risk response
B)audit strategy
C)reporting
D)risk assessment

Question 47

Total equity may be more reliable of a benchmark for determining planning materiality when a company is experiencing a _______.

A)loss or very poor operating results
B)high number of operating lease contracts
C)large amount of property, plant, and equipment purchases
D)significant volume of sales.

Question 48

What must happen before planning the audit and implementing the phase of risk assessment?

A)The client acceptance or continuation decision has to be made
B)The risk response phase has to be completed
C)The reporting phase must be undertaken
D)The audit strategy must be planned

Question 49

Information is considered qualitatively material if it _______.

A)affects a user's decision-making process for a reason other than its magnitude
B)exceeds the dollar magnitude of an auditor's planning materiality assessment
C)can be presented as a percentage of net income
D)includes liquidity ratios of interest to bond holders

Question 50

If new information comes to light that would cause the auditor to establish a different level of planning materiality, then the auditor _______.

A)should examine the information and make adjustments to materiality as needed
B)issue a qualified opinion as part of the audit report
C)follow the auditing standards that recommend an appropriate percentage of total assets as a benchmark for planning materiality for all companies
D)have management of the company select the appropriate benchmark for planning materiality

Question 51

Which of the following statements are true?

A)The auditing standards require specific percentages be applied as benchmarks in setting planning materiality.
B)For both private and publicly traded companies, the primary users of financial statements are the stockholders.
C)Auditors rely heavily on their professional judgment in setting planning materiality
D)Audit firms do not vary in the method they use to set planning materiality in the risk assessment phase.

Question 52

Misstatements that impact a user's decision-making process for a reason other than its magnitude constitute ________ materiality.

A)qualitative
B)quantitative
C)performance
D)All of these answer choices are correct

Question 53

In addition to income before income taxes, another acceptable benchmark(s) for private company audits is(are) _______.

A)total assets and total revenues
B)net income
C)income tax rate
D)net liabilities

Question 54

AU-C 300 Planning an Audit and AS 2101 Audit Planning primarily requires auditors to _______.

A)plan the audit by assessing risk to reduce audit risk to an acceptably low level
B)perform tests of the system of internal control, or tests of account balances, transactions, or disclosures
C)make decisions about the extent and timing of detailed testing of account balances and transactions
D)rely on the client's system of internal controls

Question 55

In an analysis by Eilifsen and Messier (2015), of the eight largest U.S.public accounting firms in the study, _______ firms revealed that they use "income before income taxes" as the primary benchmark for determining planning materiality.

A)seven
B)six
C)five
D)four

Question 56

Information is considered quantitatively material if it exceeds the magnitude of an auditor's _______ materiality assessment.

A)planning
B)performance
C)qualitative
D)quantitative

Question 57

What is the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated?

A)Audit risk
B)Risk response
C)Risk assessment
D)Risk reporting

Question 58

Which of the following is an amount set by the auditor that is used to make decisions about the extent of audit procedures for a particular class of transaction, account balance, or disclosure?

A)Performance materiality
B)Planning materiality
C)Overall materiality
D)Qualitative materiality

Question 59

When the financial statements are materially misstated for a particular client, which of the following will constitute an audit risk?

A)An auditor expressing an incorrect audit opinion
B)The discontinuance of an internal process from a previous year
C)Creditors and investors expressing a favorable opinion
D)Some stakeholders not relying on the auditing firm

Question 60

In general, what does detailed testing of account balances provide?

A)The evidence needed by auditors to determine if the financial statements are fairly presented
B)Information about revising preliminary conclusions drawn during the risk assessment phase
C)The exact amount of time spent gathering audit evidence
D)A listing of the audit tests performed during all phases

Question 61

MNE and Associates used the benchmark of 5% of income (earnings) before income tax and came up with $9.5 million as their planning materiality for Garden, Inc.MNE also determined that planning materiality using a benchmark of 1% total assets resulted in $23 million.How should MNE decide which planning materiality amount to use?

A)Ultimately, the auditors must use their professional judgment to decide on the planning materiality amount, along with qualitative factors in the final assessment.
B)The auditors would use the largest amount in order to detect larger material misstatements.
C)The auditors would use the smaller amount in order to keep with the principle of conservatism.
D)The auditors would average the two amounts because the use of two benchmarks provides greater precision.

Question 62

In the Eilifsen and Messier (2015) study, the firms that used benchmarks of total assets and total revenues, used what percent of these figures to determine their planning materiality?

A)0.25% to 2.0%
B)2.0% to 2.5%
C)0.25% to 5.0%
D)5.0% to 7.5%

Question 63

The use of performance materiality should reduce the ________________ and/or undetected misstatements in the financial statements is greater than materiality for the financial statements as a whole.

A)probability that the sum of immaterial
B)sum of the probabilities of material
C)difference between the material
D)the product of probabilities for material

Question 64

Martin Inc.is being audited by the firm MNE and Associates.MNE's auditors decide that $100 million is the planning materiality and $50 million is the appropriate performance materiality at the account level.If all of Martin's account balances are below $50 million, the auditors will:

A)still perform detailed some audit procedures on the account because the immaterial misstatements can be material in aggregate.
B)to perform detailed audit procedures on the accounts because the sum of Martin's accounts is greater than $50 million.
C)end audit procedures, both detailed and on controls, because performance materiality has reduced the probability that the sum of immaterial and/or undetected misstatements in the financial statements is less than materiality for the financial statements as a whole.
D)check the auditing standard guidelines for the determination of performance materiality.

Question 65

The use of performance materiality should:

A)reduce the probability that the sum of immaterial and/or undetected misstatements in the financial statements is greater than materiality for the financial statements as a whole.
B)increase the probability that the sum of immaterial and/or undetected misstatements in the financial statements is greater than materiality for the financial statements as a whole.
C)reduce the probability that the sum of immaterial and/or undetected misstatements in the financial statements is less than materiality for the financial statements as a whole.
D)increase the probability that the sum of immaterial and/or undetected misstatements in the financial statements is less than materiality for the financial statements as a whole.

Question 66

What is audit risk?

A)the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated
B)the risk that an auditor expresses an objectionable audit opinion when the financial statements are materially misstated
C)the risk that an auditor expresses an adverse opinion when the financial statements are materially misstated
D)the risk that an auditor expresses an incompatible audit opinion when the financial statements are materially misstated

Question 67

AU-C 200.A22, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance With Generally Accepted Auditing Standards states auditors should be skeptical if certain situations arise.Which situation is NOT included in those that AU-C 200.A22 presents?

A)A situation indicates that there is the need for fewer audit procedures.
B)Audit evidence recently gathered is contradictory to other evidence previously gathered.
C)New information brings into question the reliability of client documents or responses to auditor inquiries.
D)Conditions are observed that indicate evidence of possible fraud.

Question 68

After determining materiality, which of the following is NOT a step for the auditor to follow?

A)Determine who is most likely to commit fraud
B)Determine the type and extent of risk assessment procedures to be performed
C)Identify and assess the risk of material misstatements occurring at the financial statement level and the account balance level
D)Begin development of an audit strategy

Question 69

A majority of companies in the Eilifsen and Messier (2015) study used _____________ percent of income before taxes to determine planning materiality.

A)5
B)10
C)15
D)2

Question 70

The auditor can set detection risk as high if _________.

A)inherent risk and control risk are low
B)inherent risk and control risk are high
C)inherent risk is low and control risk is high
D)inherent risk is high and control risk is low

Question 71

What is performance materiality?

A)Amount or amounts set by the auditors at less than the materiality level for particular classes of transactions, account balances, or disclosures
B)Information or misstatements that impact a user's decision-making process for a reason other than its magnitude
C)Information or misstatements that exceed the magnitude of an auditor's preliminary materiality assessment, which is a percentage of an appropriate benchmark
D)None of these options are correct.

Question 72

The determination of performance materiality is _________________and involves the exercise of professional judgment.

A)not a simple mechanical calculation
B)a simple mechanical calculation
C)a simple manual calculation
D)a mechanical calculation that includes solving for derivatives

Question 73

At the assertion level, the risk of material misstatement refers to risks that affect classes of ________.

A)account balances, only
B)transactions and disclosures, only
C)disclosures, only
D)transactions, account balances, and disclosures

Question 74

A(an)______________ is an amount set by the auditor that is less than planning materiality and is used to make decisions about the extent of audit procedures for a particular class of transaction, account balance, or disclosure.

A)performance materiality
B)quantitative materiality
C)qualitative materiality
D)auditing standard

Question 75

Holding everything else constant, as the auditor's evaluation of materiality_______, the auditor is looking to obtain a more precise conclusion about the financial statements.The _______precision of the audit will cause the auditor to perform more extensive audit procedures.

A)decreases, increased
B)increases, decreased
C)increases, increased
D)decreases, decreased

Question 76

Which of the following denotes information or misstatements that exceed the magnitude of an auditor's preliminary materiality assessment?

A)Quantitative materiality
B)Qualitative materiality
C)Professional materiality
D)Professional judgement

Question 77

If auditors determine a higher planning materiality level, they will plan to gather _______ extensive audit evidence.

A)less
B)more
C)a greater proportion of
D)complex

Question 78

Which term means that (or is defined as): auditors should maintain a questioning mind and thoroughly investigate all evidence presented by the client?

A)Professional skepticism
B)Audit risk
C)Audit responsibility
D)Audit Assertion

Question 79

When would auditors increase the amount of detailed audit procedures used to test the year-end account balances and transactions from throughout the year?

A)When the detection risk is low
B)When the inherent risk is low
C)When the control risk is low
D)When the inherent risk in high

Question 80

MNE and Associates is auditing Blanchard Company.MNE has decided to use 5% of income (earnings) before income tax as a benchmark.If income (earnings) before income tax was $33 million, what would be the amount of planning materiality?

A)$1.65 million
B)$31.43 million
C)$660,000
D)$34.65 million