Deck 3: Risk Assessment I

Question 1

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

Answer 1

False

Question 2

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

Answer 2

A

Question 3

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

Answer 3

True

Question 4

The risk response phase of an audit involves:

A)The assessment of the audit firm's quality control procedures.
B)Gaining an understanding of the client.
C)Evaluating the results of the detailed testing and forming an opinion on the truth and fairness of the client's financial report.
D)The performance of detailed tests of controls and substantive testing of transactions and accounts.

Question 5

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

Question 6

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 client's ability to withstand currency fluctuations.
B)The level of competition in the client's industry.
C)Whether the client is an importer or exporter of goods.
D)The level of government support in the client's industry.

Question 7

It is the responsibility of the auditor to obtain sufficient appropriate evidence to assess the validity of the going concern assumptions made by their client's management and those charged with the governance when preparing the financial reports.

Question 8

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

Question 9

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

Question 10

The risk assessment phase of an audit involves,understanding the client,identifying factors that may impact the risk of material misstatement in the financial report,performing a risk and materiality assessment and developing an audit strategy.

Question 11

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

Question 12

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

Question 13

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 14

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

Question 15

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

Question 16

The risk assessment phase of an audit involves the performance of detailed tests of controls and substantive testing of transactions and accounts.

Question 17

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

Question 18

It is not the responsibility of the auditor to ensure that the client has applied its closing procedures appropriately.

Question 19

A client's corporate governance structure is assessed during the risk assessment phase of an audit.

Question 20

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 21

If auditors identify risk factors that indicate that the going concern assumption is in doubt,they will:

A)Refuse to continue as the auditor of their client.
B)Report the client to the Australian Taxation Office.
C)Reduce the extent of further audit testing that they undertake.
D)Undertake procedures to gather evidence regarding each risk factor.

Question 22

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 have a nomination committee.
C)A and B.
D)None of the above.

Question 23

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)Significant rapid increase in competition
B)The ability to raise additional funds via borrowings
C)The ability to sell an unprofitable segment of the business
D)A letter of guarantee from a parent company

Question 24

Attitudes and rationalisation to justify a fraud include:

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

Question 25

The going concern assumption is made when it is believed that:

A)A company is a separate legal entity.
B)A company will become insolvent within the next accounting period.
C)A company will remain in business for the foreseeable future.
D)The board of directors does not believe the company's financial report presents a true and fair view.

Question 26

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

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

Question 27

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

A)The level of unionisation among the workforce.
B)How well a client pays its employees.
C)The attitude of staff to their employer.
D)All of the above.

Question 28

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

A)If a client operates in an industry subject to changing trends,the client does not risk inventory obsolescence.
B)If a client's products or services are seasonal,this will affect revenue flow.
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 29

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

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

Question 30

When gaining an understanding of their client,at which level do auditors not usually consider the relevant issues?

A)Industry level.
B)Audit committee level.
C)Economy level.
D)Entity level.

Question 31

Opportunities to perpetrate a fraud include all the following except:

A)a high turnover of staff.
B)significant related party transactions.
C)rapid growth.
D)poor internal controls.

Question 32

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

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

Question 33

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 34

Which of the following are relevant when gaining an understanding of the client at the economy level?

A)Client's reputation.
B)Changes in interest rates.
C)Level of competition.
D)Sources of financing.

Question 35

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

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

Question 36

Red flags that auditors can use to alert them to the possibility that a fraud may have occurred include:

A)A high turnover of key employees.
B)Strong internal controls.
C)Routine transactions.
D)Effective internal auditing staff.

Question 37

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)The processes used by a client when finalising the accounts for an accounting period.
D)An intentional act through the use of deception to obtain an unjust or illegal advantage.

Question 38

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

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

Question 39

Risks associated with information technology include:

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

Question 40

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

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

Question 41

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 42

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)Data may be lost or corrupted.
D)The client has appropriate procedures for selecting new IT systems.

Question 43

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

Question 44

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

Question 45

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)Perform analytical review analysis on the client's statement of financial position.
B)Send out confirmation requests to a sample of the client's debtors.
C)Trace transactions recorded close to year-end to source documentation.
D)None of the above.

Question 46

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

Question 47

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 48

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

Question 49

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 50

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 51

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