Deck 3: Risk Assessment I

Question 1

Mary Martini's team has been asked to tackle three ongoing frauds and her partner has asked her to follow up only on the financial reporting fraud. Which of the following items will she be pursuing?

A) theft of stock by employees or customers
B) employees remaining on the payroll after ceasing employment
C) recording fictitious sales
D) unauthorized refunds to customers

Answer 1

A

Question 2

An example of an attitude or rationalization used to justify a fraud is high volume of transactions close to year-end.

Answer 2

True

Question 3

Fraud is an intentional act to obtain an unjust or illegal advantage through the use of deception.

Answer 3

True

Question 4

Kaz Nowakowski performed several procedures, including observation and inspection of the company's plans and business strategies. He also made inquiries of those individuals that were involved in the governance of the company, the internal auditors, and operating personnel. These procedures will help Kaz to determine fraud possibilities.
Prepare year end closing procedures.
Gain an understanding of the client.
None of the above.

Question 5

Auditors must gain an understanding of their client at the outset of every audit.

Question 6

Saad Zuberov is a rookie auditor who has asked you about financial reporting frauds and how they differ from misappropriation of assets frauds. Identify for Saad Zuberov which one of the following frauds consists of misappropriation of assets.

A) improper asset valuation
B) unrecorded liabilities
C) both a and b
D) none of these

Question 7

Will Durant was meeting with his manager to plan audit strategy in order to determine the amount of time to spend testing the client's internal controls and conducting detailed testing of transactions and account balances. Determining the audit strategy occurs during which phase of the audit? client acceptance stage
Planning stage
Performing stage
Reporting stage

Question 8

Application controls are policies and procedures that relate to many applications.

Question 9

The planning stage of an audit involves the performance of detailed tests of controls and substantive testing of transactions and accounts.

Question 10

Mario Moreau was at a client's offices and was preparing his work for the following day. He was considering the risk that a material misstatement due to significant error or fraud could occur in the client's financial statements. Which of the three main stages of the audit was he performing? planning stage
Performing stage
Reporting stage
None of the above

Question 11

When Sheila Copes, CGA audited a new client she asked questions about what the client does, how the client functions, the ownership structure of the client and its sources of financing. She was getting an understanding of the client at the

A) entity level.
B) industry level.
C) economy level.
D) all of the above.

Question 12

A client's corporate governance structure is assessed when planning an audit.

Question 13

Under the going concern assumption, assets are valued on the basis that they will continue to be used for the purpose of conducting a business.

Question 14

During the planning stage of a grocery chain, Seren Dagdeviren tried to determine which procedures would be appropriate. Which of these procedures, if any, would you use in the planning phase of the audit? observation and inspection
Analytical procedures
Both a and b
None of the above

Question 15

Misappropriation of assets fraud involves intentionally misstating items or omitting important facts from the financial statements.

Question 16

An auditor is not concerned with transactions and events being recorded in the correct accounting period.

Question 17

Claudia Martel knows that financial reporting fraud transactions require disclosure. However, she is not sure whether related party transactions require disclosure. You advise her that related party transactions require

A) disclosure.
B) no disclosure.
C) disclosure only if there is risk of fraud.
D) auditor judgment.

Question 18

Mitigating factors that reduce going concern risk include the ability to raise additional funds through the sale of shares.

Question 19

When Sean Green started the preliminary risk identification process at a local dairy during the planning stage of the audit he endeavoured to gather sufficient appropriate evidence. Which of the following elements were involved in the preliminary risk identification? going concern risk
Client's corporate governance
Understanding the IT environment
All of the above

Question 20

The more competitive an audit client's industry, the less pressure is placed on the client's profits.

Question 21

Which of the following statements regarding the level of demand for the goods sold or services provided by companies is correct?

A) If a client's products or services are seasonal, this will affect revenue flow.
B) If a client operates in an industry subject to changing trends, the client does not risk inventory obsolescence.
C) If a client's products or services are seasonal, this will not affect revenue flow.
D) When a product or process is subject to technological change, there is never a risk that the client will be left behind by its competitors.

Question 22

Preliminary risk identification can be affected by:

A) fraud risk.
B) corporate governance.
C) Both a and b
D) None of the above.

Question 23

Checking the accuracy of accrual calculations around year-end is an example of how auditors can assess the adequacy of their client's closing procedures.

A) risk identification and strategy
B) understanding the client
C) risk and materiality assessment
D) all of the above

Question 24

Risks associated with information technology include:

A) Loss of data.
B) Errors in programs.
C) Unauthorized access to computers.
D) All of the above.

Question 25

In assessing the client's relationship with its employees, the auditor will consider:

A) The level of unionization among the workforce.
B) The attitude of staff to their employer.
C) How well a client pays its employees.
D) All of the above.

Question 26

Which of the following statements relating to application controls is correct?

A) They impact on the procedures used for data entry, data processing and output.
B) They include procedures for purchasing new computers.
C) They are not designed to prevent or detect a material misstatement in the financial statements.
D) They include the use of passwords and other security measures to minimize the risk of unauthorized access.

Question 27

Which of the following is an example of information used by auditors in gaining an understanding of a client at the entity level?

A) The level of competition in the client's industry
B) Whether the client is an importer or exporter of goods
C) The client's ability to withstand currency fluctuations
D) The level of government support in the client's industry

Question 28

Corporate governance means:

A) the viability of a company to remain in business for the foreseeable future.
B) the rules, systems and processes within companies used to guide and control them.
C) an intentional act through the use of deception to obtain an unjust or illegal advantage.
D) the processes used by a client when finalizing the accounts for an accounting period.

Question 29

Attitudes and rationalization to justify a fraud include:

A) Significant related party transactions.
B) An excessive focus on profit maximization.
C) A significant decline in demand for the client's products or services.
D) A high volume of transactions close to year-end.

Question 30

The going concern assumption is made when it is believed that:

A) A company will become insolvent within the next accounting period.
B) The board of directors does not believe the company's financial statements are fairly presented.
C) A company will remain in business for the foreseeable future.
D) A company is a separate legal entity.

Question 31

If auditors identify risk factors that indicate that the going concern assumption is in doubt, they will:

A) Undertake procedures to gather evidence regarding each risk factor.
B) Refuse to continue as the auditor of their client.
C) Report the client to the Canada Revenue Agency.
D) Reduce the extent of further audit testing that they undertake.

Question 32

Eva Islam, CA is auditing a company where it is experiencing strikes regularly, has been under investigation with non-compliance with legislation and is falling behind competitors. What kind of risk is being assessed?

A) fraud risk
B) going concern risk
C) a and b
D) none of the above

Question 33

When assessing fraud risk, an auditor will adopt an attitude of:

A) Confidentiality.
B) Professional scepticism.
C) Belief in management.
D) None of the above.

Question 34

Which of the following is an example of a misappropriation of assets fraud?

A) Unauthorized discounts or refunds to customers
B) Inappropriate application of accounting principles
C) Unrecorded liabilities
D) Improper asset valuations

Question 35

When gaining an understanding of their client, at which level do auditors not usually consider the relevant issues?

A) audit committee level
B) economy level
C) entity level
D) industry level

Question 36

Which of the following is not an example of a mitigating factor that reduces the risk that the going concern assumption may be in doubt?

A) The ability to raise additional funds via borrowings
B) A letter of guarantee from a parent company
C) The ability to sell an unprofitable segment of the business
D) Significant rapid increase in competition

Question 37

The execution stage of an audit involves:

A) evaluating the results of the detailed testing and forming an opinion on the fair presentation of the client's financial statements.
B) the assessment of the audit firm's quality control procedures.
C) the performance of detailed tests of controls and substantive testing of transactions and accounts.
D) gaining an understanding of the client.

Question 38

Gerry Jones has been asked to review manual or automated procedures that typically operate at a business process level and apply to the processing of transactions by individual applications. What kind of controls is Gerry going to be assessing?

A) output controls
B) general controls
C) a and b
D) application controls

Question 39

Red flags that auditors can use to alert them to the possibility that a fraud may have occurred include:

A) Strong internal controls.
B) Routine transactions.
C) A high turnover of key employees.
D) Effective internal auditing staff.

Question 40

When assessing the risk of fraud, an auditor can consider:

A) Attitudes and rationalization to justify a fraud.
B) Incentives and pressures to commit fraud.
C) Opportunities to perpetuate a fraud.
D) All of the above.

Question 41

Explain the three main stages of an audit of financial statements.

Question 42

Indicate whether you agree or disagree with the following statements and explain your reasoning.
a) Related party transactions require proper identification and consideration when considering risk. However, there is no requirement to disclose related party transactions unless they have an impact on material misstatements.
b) When assessing fraud risk, auditors should adopt an attitude of professional scepticism to ensure that any indicator of a potential fraud is properly investigated.
c) The responsibility for preventing and detecting fraud rests with those charged with governance at the client as well as the auditors.
d) The auditor should not ask management and those charged with governance if they are aware of a known fraud or suspect there has been fraud.
e) Elvie Lee explained to her friend how application controls work: "Application controls are designed to prevent and detect a material misstatement in the financial statements."

Question 43

Auditors can assess the adequacy of their client's closing procedures by:

A) Checking the accuracy of accrual calculations around year-end.
B)
B) Looking at earnings trends to assess whether reported income is in line with similar periods in prior years.
C) a and
D) None of the above.

Question 44

What is fraud and what are some of the red flags that can alert auditors to the possibility that a fraud may have occurred?

Question 45

Why must auditors gain an understanding of their client at the start of every audit?

Question 46

If auditors believe there is a risk that expenses incurred before year-end will be excluded from the current year's expenses, they will:

A) Send out confirmation requests to a sample of the client's debtors.
B) Trace transactions recorded close to year-end to source documentation.
C) Perform analytical review analysis on the client's statement of financial position.
D) None of the above.

Question 47

Last year the review of Mansbridge Broadcasting did not go well for Raymond, Racicot, & Renaud, CA. In an attempt to meet budget, Peter Bossy, the auditor-in-charge, left out the review of closing procedures. His Group Partner's review notes were professional but his annual review commentary was not as complimentary. Peter was not convinced that he was at fault and felt that according to his firm's mandate, as spelled out in the engagement letter, it was the client's responsibility to ensure the adequacy of closing procedures.
This year the firm will be starting the audit of a new broadcasting client and the partner is planning the risk assessment procedures. His partner's review note reads: "Ensure that Peter Bossy gains a detailed knowledge of the Quebecor Media broadcasting operations at the entity level."
Required:
a) Comment on the partner's Mansbridge Broadcasting concerns and explain how the closing process is supposed to work.
b) Discuss the entity-level audit procedures Peter will have to follow in order to gain an understanding of Quebecor Media operations and why the entity-level procedures you identify are important.

Question 48

What should auditors do if there are risk factors that indicate that the going concern assumption is at risk?