Question 1

Brainstorming What are the steps of the brainstorming process?

Accepted Answer

The steps of the brainstorming process are:
1. Review prior year client information.
2. Consider client information, particularly with respect to the fraud triangle.
3. Integrate information from steps 1 and 2 into an assessment of the likelihood of fraud
in the engagement.
4. Identify audit responses to fraud risks

Question 2

The lower the dollar amount of the performance materiality the more audit evidence is required.

Accepted Answer

A) True 
 B)False  True

Question 3

Which of the following statements regarding detection risk is true?

Accepted Answer

A)  Detection risk incorporates both substantive analytical procedures and tests of details.
B)  Detection risk provides guidance to the auditor on the substantive audit procedures needed to achieve the desired audit risk.
C)  A low level of detection risk means the auditor needs to obtain more evidence from substantive procedures.
D)  All of the above. D

Question 4

Importance of materiality judgments Explain how auditors determine planning materiality and performance materiality.What happens if performance materiality is set too high or,alternatively,too low.

Accepted Answer

The answer of Importance of materiality judgments Explain how auditors...

Question 5

Which of the following ratios provides information about liquidity?

Accepted Answer

A)  Net profit margin.
B)  Current ratio.
C)  Inventory turnover.
D)  Sales to assets.

Question 6

The existence of one or more risk factors means that there is a material misstatement present.

Accepted Answer

A) True 
 B)False

Question 7

Audit procedures have to be announced or be completed at predictable times.

Accepted Answer

A) True 
 B)False

Question 8

If the auditor's assessment of audit risk is low (e.g. ,1% rather than 5%),what is the effect on the amount of substantive testing performed by the auditor?

Accepted Answer

A)  Increase in substantive testing.
B)  Decrease in substantive testing
C)  No change in substantive testing.
D)  Substantive testing is not needed.

Question 9

The auditor typically sets posting materiality at 50 to 75% of overall materiality.

Accepted Answer

A) True 
 B)False

Question 10

Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Accepted Answer

A) True 
 B)False

Question 11

When an auditor chooses not to rely on a client's internal controls because the control design is ineffective,which of the following tests are eliminated?

Accepted Answer

A)  Substantive testing.
B)  Tests of controls.
C)  Tests of details of balances.
D)  Substantive analytical procedures.

Question 12

Auditors and management should agree on what is considered material.

Accepted Answer

A) True 
 B)False

Question 13

Appropriateness addresses which aspect of audit procedures?

Accepted Answer

A)  Relevance.
B)  Reasoning.
C)  Reliability.
D)  Both A & C.

Question 14

Performance materiality is used for assessing the risks of material misstatement and determining the nature,timing,and extent of audit procedures to perform during the audit opinion formulation process.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following risks are controllable by the auditor?

Accepted Answer

A)  Audit risk and detection risk.
B)  Audit risk and control risk.
C)  Risk of material misstatement.
D)  None of the above.

Question 16

Which of the following best describes year-to-year comparisons of account balances?

Accepted Answer

A)  Time analyses.
B)  Reasonableness tests.
C)  Ratio analyses.
D)  Trend analyses.

Question 17

Touring a company's plant offers much insight into potential audit issues.

Accepted Answer

A) True 
 B)False

Question 18

As inherent risk increases,and other risk factors remain constant,what happens to the extent of audit work?

Accepted Answer

A)  Increases.
B)  Decreases.
C)  Stays the same.
D)  Becomes less reliable.

Question 19

LEXIS is a public database where the existence of legal proceedings against a company or key members of the company can be found.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements best describes what is meant by setting control risk at 100%?

Accepted Answer

A)  Controls are effective.
B)  Controls are relevant.
C)  Controls are ineffective.
D)  Cannot be determined from the information given.

Exam 7: Planning the Audit: Identifying and Responding to the Risks of Material Misstatement

Brainstorming What are the steps of the brainstorming process?

The lower the dollar amount of the performance materiality the more audit evidence is required.

Which of the following statements regarding detection risk is true?

Importance of materiality judgments Explain how auditors determine planning materiality and performance materiality.What happens if performance materiality is set too high or,alternatively,too low.

Which of the following ratios provides information about liquidity?

The existence of one or more risk factors means that there is a material misstatement present.

Audit procedures have to be announced or be completed at predictable times.

If the auditor's assessment of audit risk is low (e.g. ,1% rather than 5%) ,what is the effect on the amount of substantive testing performed by the auditor?

The auditor typically sets posting materiality at 50 to 75% of overall materiality.

Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

When an auditor chooses not to rely on a client's internal controls because the control design is ineffective,which of the following tests are eliminated?

Auditors and management should agree on what is considered material.

Appropriateness addresses which aspect of audit procedures?

Performance materiality is used for assessing the risks of material misstatement and determining the nature,timing,and extent of audit procedures to perform during the audit opinion formulation process.

Which of the following risks are controllable by the auditor?

Which of the following best describes year-to-year comparisons of account balances?

Touring a company's plant offers much insight into potential audit issues.

As inherent risk increases,and other risk factors remain constant,what happens to the extent of audit work?

LEXIS is a public database where the existence of legal proceedings against a company or key members of the company can be found.

Which of the following statements best describes what is meant by setting control risk at 100%?