Deck 4: Risk Assessment II

Question 1

Analytical procedures are conducted at the risk assessment phase of an audit to enhance the understanding of the auditor's client.

Answer 1

True

Question 2

A walkthrough involves an auditor tracing a transaction through a client's accounting system.

Answer 2

True

Question 3

Information is considered quantitatively material if it exceeds an auditor's preliminary materiality assessment.

Answer 3

True

Question 4

There is an inverse relationship between audit risk and detection risk as set by the auditor.

Question 5

If the client has one or more appropriate controls in place,the audit strategy is to conduct few or no tests of controls for the identified risk.

Question 6

Inventory turnover measures how many times a year a company collects cash from its debtors.

Question 7

Information can be considered material if it impacts on the decision making for the users of the financial information.

Question 8

By setting high detection risk,an auditor will:

A)Reduce the level of testing of the client's internal control system.
B)Eliminate the possibility that fraud will be detected.
C)Increase the level of reliance placed on their detailed substantive procedures.
D)Reduce the level of reliance placed on their detailed substantive procedures.

Question 9

Profitability is the ability of a company to pay its debts as they fall due.

Question 10

When classifying risks as being significant consideration is given to whether the risk involves simple routine transactions.

Question 11

Companies enter into debt covenants with lenders when taking on significant loans.

Question 12

When classifying risks as being significant consideration is not given to whether the risk:

A)Involves significant related party transactions.
B)Is related to significant economic or accounting developments.
C)Involves simple transactions.
D)Involves fraud.

Question 13

If inherent risk and control risk are low,the auditor can set detection risk as high.

Question 14

Trend analysis involves a comparison of account balances to a single line item.

Question 15

By setting a higher planning materiality level,an auditor increases the quality and quantity of evidence that needs to be obtained.

Question 16

Key performance indicators used by a client to monitor its performance provide an auditor an insight into which accounts are potentially at risk of misstatement.

Question 17

Audit risk is the risk that a client's system of internal controls will not prevent or detect a material misstatement.

Question 18

Materiality is assessed during the risk assessment phase of every audit.

Question 19

If there is a risk that management's assertion that recorded inventory exists is not valid,the auditor will:

A)Spend less time testing for the existence of recorded inventory.
B)Spend more time testing for the completeness of inventory.
C)Not adjust their audit strategy.
D)Spend more time testing for the existence of recorded inventory.

Question 20

The audit strategy is the determination of the amount of time spent testing the client's internal controls and conducting detailed testing of transactions and account balances.

Question 21

An audit strategy will include increased reliance on tests of controls when:

A)Inherent risk and control risk are low.
B)The auditor believes there is a high risk that their client's internal controls will not prevent or detect material misstatements.
C)There is a high susceptibility of assertions to material misstatements.
D)Inherent risk and control are high.

Question 22

Analytical procedures are used at which of the following phases of an audit?

A)Risk assessment
B)Risk response.
C)Final review.
D)All of the above.

Question 23

Which of the following is an example of a liquidity ratio?

A)Cost of sales divided by average inventory.
B)Gross profit divided by net sales.
C)Profit divided by average assets.
D)Non-current assets divided by total assets.

Question 24

An item that is considered material due to its nature is referred to as being;

A)Monumentally material.
B)Quantitatively material.
C)Qualitatively material.
D)Significantly material.

Question 25

What is the relationship between materiality and audit risk?

Question 26

A transaction walkthrough involves:

A)Taking a tour of the client's manufacturing facility.
B)Tracing a transaction through a client's accounting system.
C)Vouching recorded transactions back to the source documents.
D)None of the above.

Question 27

Liquidity refers to:

A)The ability of a company to pay its debts when they fall due.
B)The ability of a company to earn a profit.
C)A comparison of account balances to a single line item.
D)None of the above.

Question 28

In conducting analytical procedures,which of the following information sources are not generally considered to be reliable?

A)Information generated using consistent accounting methods.
B)Information generated by an accounting system with effective internal controls.
C)Information generated by an accounting system with ineffective internal controls.
D)Audited information.

Question 29

As a rule of thumb which of the following items would be considered immaterial?

A)An item greater than 10 per cent of profit before tax.
B)An item greater than 1 per cent of total assets.
C)An item greater than 2 per cent of equity.
D)None of the above.

Question 30

By setting a lower planning materiality level an auditor:

A)Decreases their sensitivity to a potential misstatement.
B)Decreases the quality and quantity of evidence that needs to be gathered.
C)Can be certain that they will detect all instances of fraud that have occurred.
D)Increases the quality and quantity of evidence that needs to be gathered.

Question 31

The audit strategy for a client with high inherent risk and high control risk will include:

A)Decreased reliance on substantive tests.
B)No or very limited tests of controls.
C)Increased testing of controls.
D)Increased reliance on controls.

Question 32

Which of the following is not an example of a profitability ratio?

A)Return on assets.
B)Current ratio.
C)Gross profit margin.
D)Profit margin.

Question 33

Which of the following statements about materiality is in?

A)Materiality is a key auditing concept that is assessed during the risk assessment phase of every audit.
B)Information is considered material if it has no impact on the decision-making process of financial report users.
C)Materiality is used to guide audit testing and assess the validity of information contained in the financial report.
D)The preliminary assessment of materiality guides audit planning and testing.

Question 34

Qualitative materiality refers to information that:

A)Impacts a user's decision-making process due to its magnitude.
B)Impacts a user's decision-making process for a reason other than its magnitude.
C)Exceeds an auditor's preliminary materiality assessment.
D)Is less than an auditor's preliminary materiality assessment.

Question 35

Which of the following statements regarding key performance indicators (KPIs)is ?

A)Some KPIs are common to many clients,including return on assets.
B)They reflect the success factors of an organisation.
C)They can be quantified.
D)All of the above.

Question 36

Which of the following statements relating to debt covenants is in?

A)covenants are written into loan contracts.
B)covenants restrict a company's activities.
C)if a company breaches a debt covenant it will not need to renegotiate or repay the loan.
D)companies enter into debt covenants with banks when they borrow a significant amount.

Question 37

Which of the following statements is about audit risk?
B)Audit risk is the risk that an auditor expresses an inappropriate opinion when a financial report is materially stated.
C)It is impossible to completely eliminate audit risk.
D)All of the above.
D)Audit risk can be reduced at the planning stage of an audit by identifying the key risks faced by the client.

Question 38

An item that is considered material due to its magnitude is referred to as being:

A)Of no interest to the auditor.
B)Quantitatively material.
C)Qualitatively material.
D)None of the above.

Question 39

Control risk is:

A)The risk that a client's system of internal controls will prevent or detect a material misstatement.
B)The risk that a client's system of internal controls will not prevent or detect a material misstatement.
C)The susceptibility of an assertion to a material assertion assuming there are no related controls.
D)None of the above.

Question 40

By assessing control risk as high,an auditor has determined that their client's system of internal controls:

A)Is very effective at preventing or detecting material misstatements.
B)Is very strong.
C)Will eliminate the possibility of material fraud or error.
D)Is unlikely to be effective in mitigating inherent risks identified.

Question 41

Analytical procedures are used by auditors to evaluate their clients' financial information by studying plausible relationships among both financial and non-financial data.Explain how analytical procedures are used at the different stages of an audit.

Question 42

Discuss the purpose and some common examples of profitability ratios.

Question 43

Explain audit risk and the three components of the audit risk model.

Question 44

Explain the audit approach used by an auditor when they assess control risk as high.

Question 45

Audit risk is the risk that an auditor expresses an inappropriate audit opinion when a financial report is materially stated.Why is the concept of audit risk so important to auditors and what can they do to reduce to an acceptably low level?

Question 46

Describe the profitability and liquidity approaches to measuring a client's performance.

Question 47

Gaining an understanding of a client includes auditors learning how their clients measure their performance.How is this information used by auditors in audit planning and what are examples of non-financial performance measures commonly used by auditors?