Deck 3: Risk Assessment 1

Question 1

The execution stage of an audit involves:

A) evaluating the results of the detailed testing and forming an opinion on the truth and fairness of the client's financial report
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

Answer 1

C

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

The planning stage of an audit involves, understanding the client, risk identification and strategy, risk and materiality assessment.

Question 5

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

Question 6

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

Question 7

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

Question 8

ASA 315 requires auditors to gain an understanding of the client's IT systems and the associated risks.

Question 9

Preliminary risk identification can be affected by:

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

Question 10

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

Question 11

Listed companies are required to disclose in their annual reports whether they have complied with the ASX Corporate Governance Council's principles and recommendations.

Question 12

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 13

Planning an audit of a financial report requires that an auditor plan their audit to reduce audit risk to an acceptable low level. Audit risk can be defined as;

A) The risk that the auditor does identify the material misstatements
B) The risk that the auditor expresses and inappropriate opinion at the conclusion of the audit
C) That fraud exists in the accounts and the client is aware that the fraud exists
D) That sufficient appropriate evidence cannot be gathered to form an opinion of the truthfulness of the financial statements

Question 14

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 15

There are four main stages of an audit; planning, risk assessment, execution and reporting.

Question 16

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

Question 17

Under the recommendations of the ASX Corporate Governance Council, the chair of the board of directors should not be an independent director.

Question 18

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

Question 19

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

Question 20

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

Question 21

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 Australian Taxation Office
D) Reduce the extent of further audit testing that they undertake

Question 22

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 23

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

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

Question 24

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

A) The level of unionisation 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 25

Unauthorised access to a company's data can occur when:

A) Inadequate backups of data are maintained
B) There are poor password protection procedures
C) Computer programs are tested thoroughly
D) There are sufficient security procedures

Question 26

Risks associated with information technology include;

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

Question 27

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 28

The 'if not, why not' approach of the ASX Corporate Governance Council to its recommendations requires companies to:

A) Disclose whether they have complied with the principles and recommendations
B) Establish an audit committee
C) Report to ASIC any breaches by their auditor of the Code of Ethics
D) Have a majority of the board as independent directors

Question 29

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 report presents a true and fair view
C) A company will remain in business for the foreseeable future
D) A company is a separate legal entity

Question 30

The purchase of a new 'off the shelf' program reduces the risks as;

A) The business will adjust to meet the new software needs
B) The software has been tested before being made available for sale
C) There is an ease in adapting the software for the companies reporting needs
D) There is no risk of date being lost in transition to the new system

Question 31

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

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 32

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

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

Question 33

Which of the following statements relating to application controls is ?

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 report
D) They include the use of passwords and other security measures to minimise the risk of unauthorised access

Question 34

Attitudes and rationalisation to justify a fraud include:

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

Question 35

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 36

An auditor is usually most concerned with which of the ASX Corporate Governance Council's principles?

A) Respect the rights of shareholders
B) Safeguard integrity in financial reporting
C) Structure the board to add value
D) Remunerate fairly and responsibly

Question 37

The ASX Corporate Governance Council's Principle 2 'Structure the board to add value' includes which of the following recommendations?

A) The chair should be an independent director
B) The board should establish a nomination committee
C) a and b
D) None of the above

Question 38

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 finalising the accounts for an accounting period

Question 39

Which of the following is not an example of a risk when a client installs a new IT system?

A) Client staff are not adequately trained to use the new system effectively
B) The system may not be appropriate for the client
C) The client has appropriate procedures for selecting new IT systems
D) Data may be lost or corrupted

Question 40

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 41

ASA 300 Planning an Audit of a Financial Report requires that auditors plan their audits. Why is planning such an important stage of every audit and explain the various aspects of the preliminary risk identification process?

Question 42

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

Question 43

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

Question 44

When gaining an understanding of their clients, auditors consider the particular information technology risks faced by their clients. Explain the particular risks associated with information technology and discuss the main controls that companies can have in place to mitigate these risks.

Question 45

Corporate governance is the rules, systems and processes within companies used to guide and control them. Why are auditors concerned with the corporate governance structures of their clients and what is the current status of corporate governance regulation in Australia?

Question 46

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

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

Question 47

What is corporate governance and what are the eight principles of corporate governance according to the ASX Corporate Governance Council?

Question 48

Checking the accuracy of accrual's 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 49

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

Question 50

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 51

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