Deck 6: Risk

Question 1

After the initial planning the auditor's estimate of the risks of a material misstatement in the financial statements of Toro Ltd is low. What audit approach would be appropriate in that situation?

A) No substantive testing but an emphasis on tests of controls within the accounting system and substantive testing of assets and liabilities
B) Some substantive testing of assets and liabilities plus a risk based approach to a consideration of business risks
C) Little or no testing of controls because if the efficiency of the system resulting in a low estimate of control risk plus substantive testing of assets and liabilities
D) Consideration of business risks only with no substantive or compliance testing

Answer 1

Some substantive testing of assets and liabilities plus a risk based approach to a consideration of business risks

Question 2

Audit risk can be completely eliminated through the use of appropriate auditing techniques.

Answer 2

False

Question 3

If the company has a low inherent risk and low control risk then the estimate of audit risk will also be low.

Answer 3

True

Question 4

Audit is the risk that auditing procedures will not detect a material misstatement.

Question 5

Audit risk is the risk of giving an audit opinion which states that the financial statements are true and fair when they are not.

Question 6

Splendid Paints buys much of its specialist paint from overseas. Purchase orders have to be made six months in advance and goods can take up to two months to be delivered. The audit risk in this case is:

A) The business might run out of paints thus causing inventory shortages with a consequent effect on the financial results
B) Valuation of inventory might be difficult in establishing correct costs at the time it was delivered
C) The cut off is difficult to establish i.e. there is a difficulty of knowing what is in inventory at the period end and what accruals to include in respect of that inventory.
D) The value of Inventory might be overstated or understated due to foreign currency movements

Question 7

Which TWO of the following should be included in an audit engagement letter?
(1) Objective and scope of the audit
(2) Results of previous audits
(3) Management's responsibilities
(4) Need to maintain professional scepticism

A) 1 and 2
B) 1 and 3
C) 2 and 4
D) 3 and 4

Question 8

Which of the following is NOT an inherent risk when considering the efficiency and effectiveness of internal control systems?

A) Insufficient segregation of duties
B) Possibility that employees may collude together fraudulently
C) Possibility of human error in undertaking tasks
D) Boredom involved in repetitious tasks

Question 9

The Audit Planning Memorandum records the rationale for the audit strategy and the audit programme

Question 10

Audit risk is a calculated value of Inherent Risk x Control Risk

Question 11

Earnings management can be used to create a false impression of the performance of the business but can also be of benefit by reducing some costs in bad trading years or linking rewards to performance

Question 12

Before the audit commences the auditor should consider any independence issues as part of audit planning