Deck 6: Assessing Risks in an Audit Engagement

Question 1

The inclusion in the records of a business of machinery that belongs to a shareholder,is an example of improper application of which financial statement assertion?

A)Existence (occurrence)
B)Completeness
C)Ownership (rights and obligation)
D)Presentation (classification and disclosure)

Answer 1

C

Question 2

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

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

Answer 2

C

Question 3

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

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

Answer 3

A

Question 4

Theoretically,when assessing the inherent risk related to an account balance,an auditor does not explicitly consider the ________.

A)susceptibility of the account to theft
B)management estimates involved in determining the account balance
C)internal control policies and procedures
D)complexity of calculations involved

Question 5

The audit objective specifying that "all recorded assets,liabilities,and transactions represent real assets,liabilities,revenues,and expenses" is related most closely to which assertion(s)?

A)Existence or occurrence.
B)Rights and obligations.
C)Completeness.
D)Presentation and disclosure.

Question 6

Which of the following statements concerning financial statement assertions is false?

A)They are the claims management makes in presenting its financial statements.
B)Their appropriate application is determined in reference to GAAP,or the disclosed basis of accounting.
C)They are directly tied to the audit objectives auditors use to design specific evidence-gathering procedures.
D)They must be fully disclosed in the notes to the financial statements.

Question 7

Audit procedures designed to verify that overhead costs are properly included in cost of goods sold,most closely relate to which assertion(s)?

A)Existence or occurrence.
B)Rights and obligations.
C)Completeness.
D)Classification (Presentation and disclosure)

Question 8

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

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

Question 9

Under GAAS,which of the following is an appropriate justification for accepting to perform an audit when the risk to the auditor from accepting the engagement is high?

A)The auditor believes that the audit risk can be reduced to a very low level by performing extensive audit work.
B)The auditor believes the risk of material misstatement remains low.
C)The auditor has assessed control risk as low.
D)The auditor believes the high audit fee outweighs the risk of legal liability from association with the financial statements

Question 10

The business process view also highlights the fact that business organizations ________.

A)differ in terms of the technology they use
B)essentially all perform the same activities
C)should simplify their business to follow clear rules
D)work best when run as a hierarchy

Question 11

If inherent risk increases and all other risks in the audit risk model stay constant (except the one referred to below),which of the following is correct?

A)Detection risk must increase.
B)Control risk will increase.
C)Audit risk will decrease.
D)Detection risk must decrease.

Question 12

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 ________.

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

Question 13

An auditor assesses management's ability to identify and respond to its business risks because:

A)It reduces the auditor's risk of accepting the audit engagement
B)It reduces the amount of planned audit evidence.
C)It reduces the risk of material misstatement at the financial statement level.
D)It reduces the preliminary assessment of materiality.

Question 14

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

A)Level of assurance to be obtained through substantive tests
B)risk of misapplying auditing procedures
C)preliminary judgment about materiality levels
D)risk the auditor's procedures will fail to discover material misstatements

Question 15

Business processes cross boundaries between functional areas of an organization.Business process management systems have been facilitated by _______.

A)management information systems
B)enterprise resource planning systems
C)database management systems
D)Web-based application systems

Question 16

To ensure that a high level of assurance is provided by the audit opinion,what must the auditor do?

A)Plan and execute the audit to ensure an acceptably low risk of material misstatement is achieved.
B)Plan and execute the audit to ensure an acceptably low level of audit risk is achieved.
C)Plan and execute the audit to ensure an acceptably low level of inherent risk is achieved.
D)Plan and execute the audit to ensure an acceptably low level of detection risk is achieved.

Question 17

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

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 18

What is inherent risk?

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 19

The valuation assertion includes ________.

A)the measurement assumption used
B)ensuring all inventory is counted
C)making sure that all receivables relate to sales during the year
D)the method of presenting short-term and long-term liabilities

Question 20

The three levels at which assertion terms are defined under CAS 315 are:

A)Financial statement,account balance level,and transaction level.
B)Account balance,transaction and presentation and disclosure
C)Management level,auditor level,and user level.
D)Account balance,entity,and presentation and disclosure.

Question 21

One way to think of an accounting process is as a cycle.The idea of a cycle reflects that ________.

A)transactions have to undergo a series of procedures before being recorded in the accounts
B)transactions are not complete until they are recorded
C)there is a set of accounts that record transaction information from the same business process
D)every business process results in the start of another process

Question 22

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

Question 23

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.

Question 24

To help achieve good governance,international best practice recommends all but which of the following be implemented?

A)A majority the members of the board of directors should not hold management positions.
B)Create an independent audit committee to oversee the financial reporting process.
C)Require the internal audit team report directly to management.
D)Have a compensation committee that aligns management rewards with shareholder interests.

Question 25

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

Question 26

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

Question 27

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

Question 28

Control risk is the probability that audit procedures will fail to detect material misstatements in the financial statements.

Question 29

A completeness error occurs when an account balance is overstated.

Question 30

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

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 31

Control testing procedures provide no direct evidence of material misstatements in the auditee's statements

Question 32

The only component of audit risk that the auditor can directly influence is detection risk.

Question 33

Business processes can be thought of as a structured set of activities within an entity.

Question 34

Which of the following statements best describes the relationship between materiality and audit risk?

A)Both materiality and audit risk are directly related to the planned level of substantive procedures to be performed.
B)Materiality and audit risk are assessed independently of each other.
C)A higher assessed materiality level results in a higher assessed audit risk level.
D)A lower assessed materiality level results in a higher assessed audit risk level.

Question 35

Which of the following statements concerning the audit risk model is false?

A)It is used to determine the planned level of substantive audit testing to be performed in the audit.
B)It is useful as a planning tool at the beginning of the audit.
C)It is applied at both the financial statement and individual account and financial statement assertion levels.
D)It allows the auditor to accurately quantify the level of audit risk.

Question 36

After obtaining an understanding of the internal control system and assessing control risk,an auditor decided not to perform additional tests of controls.The auditor most likely concluded that ________.

A)the additional evidence to support a further reduction in control risk was not cost-beneficial
B)the assessed level of inherent risk exceeded the assessed level of control risk
C)the internal control system was properly designed and justifiably may be relied on
D)the evidence obtainable through tests of controls would not support an increased level of control risk

Question 37

An auditor begins the identification of business risks by doing what?

A)Preliminary analysis.
B)Financial analysis.
C)Strategic analysis.
D)Horizontal analysis.

Question 38

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

Question 39

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 ________.

A)decrease inherent risk to offset the increased control risk level
B)decrease detection risk and increase planned substantive audit procedures
C)increase inherent risk and decrease planned substantive audit procedures
D)increase materiality levels

Question 40

An auditor considers two factors in understanding business risks.What are they?

A)The likelihood of a risk occurring and the materiality of the risk.
B)The magnitude of the risk and the type of risk.
C)The likelihood of the risk occurring and the type of risk.
D)The likelihood of a risk occurring and the magnitude the risk.

Question 41

Generally accepted auditing standards permit auditors to place complete reliance on internal control (zero control risk assessment)to justify the exclusion of substantive audit procedures for a balance sheet or income statement account.

Question 42

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

Question 43

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

Question 44

Define control risk.

Question 45

An auditor examines an organization's strategy to determine its objectives.After assessing whether the strategy is guiding the whole operation,what steps will the auditor take next? What key management assertion can be affected by any weakness in the strategy?

Question 46

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

Question 47

Give some examples of cut off errors and explain what management assertions are affected by such errors.

Question 48

Discuss four ways of managing risk in an organization.

Question 49

Canadian auditing standards require an assessment of client's business for every audit,risk as part of a risk-based audit approach.

Question 50

Explain the relationships among the business processes and accounting processes (or cycles)and how it affects the auditors planned audit procedures.

Question 51

Auditors find it easier to audit related accounts instead of attacking each account individually.

Question 52

What factors are considered as part of the auditor's assessment of client business risks?