Deck 4: Risk Assessment II

Question 1

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

Answer 1

False

Question 2

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

A) is related to significant economic or accounting developments
B) involves simple transactions
C) involves significant related party transactions
D) involves fraud

Answer 2

B

Question 3

Materiality is assessed during the planning stage of every audit.

Answer 3

True

Question 4

Which of the following statements is about audit risk?

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

Question 5

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

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

Question 6

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

Question 7

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

Question 8

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

Question 9

Control risk is:

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

Analytical procedures are conducted at the planning stage of an audit to enhance the understanding of the auditor's client.

Question 15

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

Question 16

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

Question 17

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

Question 18

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 19

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 20

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

Question 21

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) is less than an auditor's preliminary materiality assessment
D) exceeds an auditor's preliminary materiality assessment

Question 22

Which of the following is an example of an item considered qualitatively material according to AASB 1031 Materiality?

A) a change in an accounting method
B) related party transactions
C) being in danger of breaching a debt covenant
D) all of the above

Question 23

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

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

Question 24

An audit strategy:

A) is determined by the client
B) involves determining the amount of time to be spent testing the client's internal controls and conducted detailed substantive testing
C) sets the scope, timing and direction of the audit
D) both b and c

Question 25

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

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

Question 26

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

A) Final review
B) Planning
C) Execution
D) All of the above

Question 27

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

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

Question 28

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

A) quantitatively material
B) of no interest to the auditor
C) qualitatively material
D) none of the above

Question 29

A transaction walkthrough involves:

A) taking a tour of the client's manufacturing facility
B) vouching recorded transactions back to the source documents
C) tracing a transaction through a client's accounting system
D) none of the above

Question 30

Analytical procedures are conducted at the planning stage of the audit to:

A) aid in the identification of risk
B) identify where fraud has occurred
C) enhance the understanding of a client
D) both a and c

Question 31

Which of the following statements about materiality is in?

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

Question 32

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

A) Gross profit divided by net sales
B) Profit divided by average assets
C) Cost of sales divided by average inventory
D) Current assets divided by current liabilities

Question 33

By setting a lower planning materiality level an auditor:

A) decreases the quality and quantity of evidence that needs to be gathered
B) does not change the audit strategy they use
C) increases the quality and quantity of evidence that needs to be gathered
D) can be certain that they will detect all instances of fraud that have occurred

Question 34

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

A) no or very limited tests of controls
B) decreased reliance on substantive tests
C) increased testing of controls
D) increased reliance on controls

Question 35

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

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

Question 36

Common measures of a company's profitability include:

A) price-earnings ratio
B) earnings per share
C) both a and b
D) quick ratio

Question 37

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

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

Question 38

Liquidity refers to:

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

Question 39

By setting high detection risk, an auditor will:

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

Question 40

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

A) they reflect the success factors of an organisation
B) they can be quantified
C) some KPIs are common to many clients, including return on assets
D) all of the above

Question 41

What is the relationship between materiality and audit risk?

Question 42

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?

Question 43

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

Question 44

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

Question 45

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 46

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 47

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

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

Question 48

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

Question 49

Discuss the purpose and some common examples of profitability ratios.