Question 1

When assessing risk,it is important to remember that:

Accepted Answer

A)   for acceptable audit risk, the SEC decides the risk the CPA firm should take for public clients.
B)   inherent risk can be changed by the auditor.
C)   detection risk can only be determined after audit risk, inherent risk, and control risk are determined.
D)   control risk is determined by company management since they are responsible for internal control. C

Question 2

The measurement of the auditor's assessment of the likelihood that there are material misstatements due to error or fraud in a segment before considering the effectiveness of internal controls is defined as:

Accepted Answer

A)   audit risk.
B)   inherent risk.
C)   sampling risk.
D)   detection risk. B

Question 3

Which of the following is an incorrect statement regarding the allocation of the preliminary judgment about materiality to balance sheet accounts?

Accepted Answer

A)   Auditors expect certain accounts to have more misstatements than others.
B)   The allocation has virtually no effect on audit costs because the auditor must collect sufficient appropriate audit evidence.
C)   Auditors expect to identify overstatements as well as understatements in the accounts.
D)   Relative audit costs affect the allocation. B

Question 4

Dracule Industries is a privately owned business that sells medical product and devices to hospitals,clinics and the public.Certain changes have occurred in Dracule Industries during the year undergoing the audit.Harker needs to evaluate the effect these changes have on audit risk.Audit risk at the financial statement level is influenced by the risk of material misstatement; which include factors related to management,the industry and the entity or a combination thereof.For each of the following changes that have occurred during the year under audit identify the appropriate audit response for the list of responses.Each response can be used once,more than once or not at all.

Accepted Answer

The answer of Dracule Industries is a privately owned business...

Question 5

Auditors may assess inherent risk and control risk:

Accepted Answer

A)   
B)   
C)   
D)

Question 6

Inherent risk is ________ related to detection risk and ________ related to the amount of audit evidence.

Accepted Answer

A)   directly, inversely
B)   directly, directly
C)   inversely, inversely
D)   inversely, directly

Question 7

Most practitioners allocate the preliminary judgment about materiality to both the balance sheet and income statement accounts.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is the primary basis used to decide materiality for a for-profit entity?

Accepted Answer

A)   Net sales
B)   Net assets
C)   Net income before tax
D)   All of the above

Question 9

________ misstatements are those where the auditor can determine the amount of the misstatement in the account.

Accepted Answer

A)   Potential
B)   Likely
C)   Known
D)   Projected

Question 10

The preliminary judgment on materiality is compared to the total estimated misstatement amount to determine if an account balance is materially misstated.

Accepted Answer

A) True 
 B)False

Question 11

When allocating performance materiality:

Accepted Answer

A)   it is easy to predict in advance which accounts are mot likely to be misstated.
B)   only overstatements need to be considered.
C)   professional judgment is critical.
D)   the sum of all the performance materiality levels cannot exceed the preliminary judgment about materiality.

Question 12

If the auditor approaches the audit of the accounts in s sequential manner,the findings of the audit of accounts audited earlier can be used to revise the performance materiality established for accounts audited later.

Accepted Answer

A) True 
 B)False

Question 13

The auditing profession has established guidelines for setting inherent risk.

Accepted Answer

A) True 
 B)False

Question 14

The most important element of the audit risk model is control risk.

Accepted Answer

A) True 
 B)False

Question 15

Statements on Auditing Standards provide detailed,objective guidance on how auditors are to establish a preliminary materiality level,thus eliminating the need for subjective auditor judgment in this task.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements regarding inherent risk is correct?

Accepted Answer

A)   Inherent risk is unaffected by the auditor's experience with client's organization.
B)   Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows that it was incorrect.
C)   Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain more knowledge about the company.
D)   Inherent risk is dependent upon the strengths in client's internal control system.

Question 17

Inherent risk is often high for an account such as:

Accepted Answer

A)   inventory.
B)   land.
C)   capital stock.
D)   notes payable.

Question 18

If the preliminary judgment of materiality increases,the amount of audit evidence required will decrease.

Accepted Answer

A) True 
 B)False

Question 19

To what extent do auditors typically rely on internal controls of their public company clients?

Accepted Answer

A)   Extensively
B)   Only very little
C)   Infrequently
D)   Never

Question 20

Planned detection risk I.determines the amount of substantive evidence the auditor plans to accumulate.
II)is dependent on inherent risk and business risk.

Accepted Answer

A)   I only
B)   II only
C)   I and II
D)   None of the above

Exam 9: Considering Materiality and Audit Risk

When assessing risk,it is important to remember that:

The measurement of the auditor's assessment of the likelihood that there are material misstatements due to error or fraud in a segment before considering the effectiveness of internal controls is defined as:

Which of the following is an incorrect statement regarding the allocation of the preliminary judgment about materiality to balance sheet accounts?

Auditors may assess inherent risk and control risk:

Inherent risk is related to detection risk and related to the amount of audit evidence.

Most practitioners allocate the preliminary judgment about materiality to both the balance sheet and income statement accounts.

Which of the following is the primary basis used to decide materiality for a for-profit entity?

________ misstatements are those where the auditor can determine the amount of the misstatement in the account.

The preliminary judgment on materiality is compared to the total estimated misstatement amount to determine if an account balance is materially misstated.

When allocating performance materiality:

If the auditor approaches the audit of the accounts in s sequential manner,the findings of the audit of accounts audited earlier can be used to revise the performance materiality established for accounts audited later.

The auditing profession has established guidelines for setting inherent risk.

The most important element of the audit risk model is control risk.

Statements on Auditing Standards provide detailed,objective guidance on how auditors are to establish a preliminary materiality level,thus eliminating the need for subjective auditor judgment in this task.

Which of the following statements regarding inherent risk is correct?

Inherent risk is often high for an account such as:

If the preliminary judgment of materiality increases,the amount of audit evidence required will decrease.

To what extent do auditors typically rely on internal controls of their public company clients?

Planned detection risk I.determines the amount of substantive evidence the auditor plans to accumulate. II) is dependent on inherent risk and business risk.