Question 1

In a general timeline of when audit activities occur for the audit of a client that uses a calendar year-end, the period referred to as "interim" is typically during the latter part of the ________.

Accepted Answer

A) third quarter and into the fourth quarter 
B) second quarter and into the third quarter 
C) first quarter and into the second quarter 
D) first quarter through fourth quarter

Question 2

Lower inherent risk traits are found where _______.

Accepted Answer

A) technological developments are a minimal factor in the valuation of the client's assets 
B) the client's industry is experiencing a period of decline 
C) the client has insufficient working capital and is at risk of violating loan contracts 
D) the client's location is at risk of facing natural disasters, such as hurricanes and flooding

Question 3

When considering clients like Boeing, inventory will most likely be the largest current asset and prepaid expenses will be one of the smallest.As a result, the auditors should plan to _______.

Accepted Answer

A) devote more audit time to the inventory account than the prepaid expenses account 
B) devote more audit time to prepaid expenses to the inventory account 
C) use more complex audit tests for inventory and more simple audit tests for prepaid expenses 
D) observe more material misstatements in prepaid expenses due to timing differences as compared to the inventory account

Question 4

Substantive procedures are designed to _______.

Accepted Answer

A) detect material misstatements at the assertion level 
B) evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level 
C) determine the quantity of audit procedures to be performed 
D) determine when the audit procedures will be performed

Question 5

In auditing, which of the following attitudes are part of professional skepticism?

Accepted Answer

A) Being alert to conditions that may indicate possible misstatement due to fraud 
B) A critical assessment of audit evidence 
C) An assumption that client management is being dishonest 
D) Allowing for a degree of misstatement attributable to human error

Question 6

What is audit risk?

Accepted Answer

A) the risk that an auditor expresses an inappropriate audit opinion when the financial statements are materially misstated 
B) the risk that an auditor expresses an objectionable audit opinion when the financial statements are materially misstated 
C) the risk that an auditor expresses an adverse opinion when the financial statements are materially misstated 
D) the risk that an auditor expresses an incompatible audit opinion when the financial statements are materially misstated

Question 7

Which of the following are examples of human bias that could cause an impediment in the application of professional skepticism?

Accepted Answer

A) An overconfidence in management 
B) A desire to keep audit costs low 
C) A desire to sell other services to the client 
D) An attempt to meet multiple deadlines simultaneously

Question 8

In general, what does detailed testing of account balances provide?

Accepted Answer

A) The evidence needed by auditors to determine if the financial statements are fairly presented 
B) Information about revising preliminary conclusions drawn during the risk assessment phase 
C) The exact amount of time spent gathering audit evidence 
D) A listing of the audit tests performed during all phases

Question 9

The assessed level of inherent and control risk for each assertion will _______.

Accepted Answer

A) guide auditors in developing their audit strategy to gather appropriate audit evidence 
B) guarantee the effectiveness of the client's system of internal controls 
C) eliminate the risk of material misstatement for each account 
D) eliminate the need for professional skepticism

Question 10

Which of the following examples most likely is an attitude or rationalization used to justify a fraud?

Accepted Answer

A) An excessive focus on maximization of profits and/or stock price 
B) An excessive focus on unionization 
C) An excessive focus on vacation time 
D) An excessive focus on application of ethical standards

Question 11

The use of performance materiality should reduce the ________________ and/or undetected misstatements in the financial statements is greater than materiality for the financial statements as a whole.

Accepted Answer

A) probability that the sum of immaterial 
B) sum of the probabilities of material 
C) difference between the material 
D) the product of probabilities for material

Question 12

Which of the following is a positive factor influencing client acceptance and retention decisions with respect to the integrity of management?

Accepted Answer

A) Management places a premium on representational faithfulness of accounting information. 
B) Concerns exist about the integrity of management in business and accounting decisions. 
C) Management is preoccupied with meeting specific accounting numbers. 
D) Management integrity in business and accounting decisions seem to be situational and only remedied when noted by the auditors.

Question 13

In accounting, "year-end" is typically the period _______.

Accepted Answer

A) when the client's accounting year has substantially finished, and the account balances reflect the totals for the entire year under audit 
B) that is 4-6 weeks after the auditors leave the client's location 
C) during the latter part of the third quarter and into the fourth quarter 
D) when most of the audit planning and risk assessment occur

Question 14

In the Eilifsen and Messier (2015) study, the firms that used benchmarks of total assets and total revenues, used what percent of these figures to determine their planning materiality?

Accepted Answer

A) 0.25% to 2.0% 
B) 2.0% to 2.5% 
C) 0.25% to 5.0% 
D) 5.0% to 7.5%

Question 15

An engagement letter is prepared by the _______ and acknowledged by the _______ before the audit begins.

Accepted Answer

A) auditor; client 
B) client; client 
C) auditor; state government 
D) federal government; client

Question 16

A(an)______________ is an amount set by the auditor that is less than planning materiality and is used to make decisions about the extent of audit procedures for a particular class of transaction, account balance, or disclosure.

Accepted Answer

A) performance materiality 
B) quantitative materiality 
C) qualitative materiality 
D) auditing standard

Question 17

Prevention of fraud refers to _______.

Accepted Answer

A) the use of controls and procedures aimed at avoiding a fraud 
B) the use of controls and procedures aimed at uncovering a fraud should one occur 
C) auditors who assess fraud risk factors 
D) incentives to commit fraud

Question 18

The factor that influences client acceptance and retention decisions with respect to whether the accounting firm has the expertise to perform the services requested by the client is known as:

Accepted Answer

A) competence issues. 
B) independence issues. 
C) integrity of management. 
D) special circumstances and unusual risk.

Question 19

If a company refuses permission to contact its previous audit firm, what should the new auditor do?

Accepted Answer

A) Consider the implications of that refusal when deciding whether to accept the engagement. 
B) Contact potential third parties to gain information about the client firm. 
C) Review newspaper and magazine articles about the client. 
D) Do a background check on the CEO of the company.

Question 20

If RMM is low, which of the following would be true of the audit strategy?

Accepted Answer

A) The nature, extent, and timing of substantive procedures would be adjusted. 
B) The strategy will be to rely more on the client's internal controls. 
C) The strategy would be to rely more on the auditor's substantive procedures. 
D) Auditors may decide to use larger sample sizes.

Exam 3: Risk Assessment Part Iaudit Risk and Audit Strategy