Deck 6: Assessing Risks in an Audit Engagement

Question 1

The acceptable level of detection risk is inversely related to the ________.

A)assurance provided by substantive tests
B)risk of misapplying auditing procedures
C)preliminary judgment about materiality levels
D)risk of failing to discover material misstatements

Answer 1

A

Question 2

Inherent risk and control risk differ from detection risk in that they ________.

A)arise from the misapplication of auditing procedures
B)may be assessed in either quantitative or non-quantitative terms
C)exist independently of the financial statement audit
D)can be changed at the auditor's discretion

Answer 2

C

Question 3

After obtaining an understanding of the internal control system and assessing control risk,an auditor decided not to perform additional tests of controls.The auditor most likely concluded that ________.

A)the additional evidence to support a further reduction in control risk was not cost-beneficial
B)the assessed level of inherent risk exceeded the assessed level of control risk
C)the internal control system was properly designed and justifiably may be relied on
D)the evidence obtainable through tests of controls would not support an increased level of control risk

Answer 3

A

Question 4

An auditor begins the identification of business risks by doing what?

A)Preliminary analysis.
B)Financial analysis.
C)Strategic analysis.
D)Horizontal analysis.

Question 5

Theoretically,when assessing the inherent risk related to an account balance,an auditor does not explicitly consider the ________.

A)liquidity of the account
B)management estimates involved in determining the account balance
C)internal control policies and procedures
D)complexity of calculations involved

Question 6

The probability that an auditor will give an inappropriate opinion on the financial statements best describes ________.

A)audit risk
B)inherent risk
C)control risk
D)detection risk

Question 7

Business processes cross boundaries between functional areas of an organization.Business process management systems have been facilitated by _______.

A)management information systems
B)enterprise resource planning systems
C)database management systems
D)Web-based application systems

Question 8

An auditor considers two factors in understanding business risks.What are they?

A)The likelihood of a risk occurring and the materiality of the risk.
B)The magnitude of the risk and the type of risk.
C)The likelihood of the risk occurring and the type of risk.
D)The likelihood of a risk occurring and the magnitude the risk.

Question 9

One way to think of an accounting process is as a cycle.The idea of a cycle reflects that ________.

A)transactions have to undergo a series of procedures before being recorded in the accounts
B)transactions are not complete until they are recorded
C)there is a set of accounts that record transaction information from the same business process
D)every business process results in the start of another process

Question 10

The business process view also highlights the fact that business organizations ________.

A)differ in terms of the technology they use
B)essentially all perform the same activities
C)should simplify their business to follow clear rules
D)work best when run as a hierarchy

Question 11

When an auditor increases the planned assessed level of control risk because certain control procedures were determined to be ineffective,the auditor would most likely increase the ________.

A)extent of tests of details
B)level of inherent risk
C)extent of tests of controls
D)level of detection risk

Question 12

On the basis of audit evidence gathered and evaluated,an auditor decides to increase the assessed level of control risk from that originally planned.To achieve an overall audit risk level that is substantially the same as the planned audit risk level,the auditor would ________.

A)decrease substantive testing
B)decrease detection risk
C)increase inherent risk
D)increase materiality levels

Question 13

What is inherent risk?

A)The probability that some accounts are more susceptible to misstatement than others.
B)The probability that the client's internal control policies and procedures will fail to detect material misstatements.
C)The probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements.
D)The probability that the auditor may not detect material misstatements in the financial statements.

Question 14

An auditor might suspect that the auditee is in financial difficulty if ________.

A)the auditee offers more generous customer credit terms
B)the auditee takes a large bank loan at market rates
C)sales increase and inventory increases
D)purchases increase and payables increase

Question 15

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the ________.

A)factors that raise doubts about the auditability of the financial statements
B)operating effectiveness of internal control policies and procedures
C)risk that material misstatements exist in the financial statements
D)possibility that the nature and extent of substantive tests may be reduced

Question 16

Quality of earnings refers to ________.

A)the accuracy of the net income calculation
B)a company's ability to continue earning at its current level
C)how closely earnings per share agree to analyst predictions
D)the percentage of net income to total revenue

Question 17

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when,in fact,such misstatement actually does exist is ________.

A)audit risk
B)inherent risk
C)control risk
D)detection risk

Question 18

The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor ________.

A)obtains reasonable assurance about whether the financial statements are free of material misstatement
B)assesses the accounting principles used and also evaluates the overall financial statement presentation
C)realizes some matters,either individually or in the aggregate,are important while other matters are not important
D)is responsible for expressing an opinion on the financial statements,which are the responsibility of management

Question 19

What is the definition of business risk?

A)An event or action that will make it more difficult for an organization to achieve its objectives.
B)An event or action that causes an organization to become bankrupt.
C)An event or action that causes an organization's financial statements to be materially incorrect.
D)Unfortunate events or actions that are common to all businesses in the economy.

Question 20

If control risk increases and all other risks in the audit risk model stay constant (except the one referred to below),which of the following is correct?

A)Detection risk must increase.
B)Inherent risk will increase.
C)Audit risk will decrease.
D)Detection risk must decrease.

Question 21

Audit risk is the probability that an auditor will give an inappropriate opinion on financial statements.

Question 22

Since management is most familiar with an organization,they should sit on the board of directors and advise those charged with governance of the organization.

Question 23

Management's philosophy and operating style have to do with how the business is operated and are not part of the internal control environment.

Question 24

Generally accepted auditing standards permit auditors to place complete reliance on internal control (zero control risk assessment)to justify the exclusion of substantive audit procedures for a balance sheet or income statement account.

Question 25

Business processes can be thought of as a structured set of activities within an entity.

Question 26

Detection risk is the probability that audit procedures will produce evidence of material misstatements.

Question 27

A critical element of control is monitoring.What is likely to happen if management fails to monitor an internal control?

A)Necessary improvements will not be identified.
B)Personnel are likely to stop observing the control.
C)The inherent risk of an error will increase.
D)The auditor is likely to assume the control is working when it might not be.

Question 28

Define control risk.

Question 29

An organization with a very hierarchical structure is typical of companies in complex business environments as this structure reduces the ability of a junior employee to make a wrong decision.

Question 30

Auditors do not create or control inherent risk;they can only try to assess its magnitude.

Question 31

As control risk gets smaller,audit risk gets larger,assuming all other risks stay constant.

Question 32

To assess the risk of material misstatement at the financial statement level,the auditor needs a detailed knowledge of internal control components relevant to financial reporting.

Question 33

Risk should not be tolerated on a cost-benefit basis.

Question 34

Auditors find it easier to audit related accounts instead of attacking each account on its own.

Question 35

Internal control includes ________.

A)control activities and inherent risks
B)information systems and external influences
C)the control environment and risk assessment processes
D)financial reporting and control activities

Question 36

Control risk is the probability that audit procedures will fail to detect material misstatements in the financial statements.

Question 37

An auditor can broadly define controls as ________.

A)those elements of an organization that,taken together,support people in achieving an organization's objectives
B)those systems,processes,and procedures that prevent fraud
C)key performance indicators employed by management to measure an organization's success
D)the structure and culture of an organization which helps to eliminate risk

Question 38

Two broad groupings of controls are ________.

A)internal controls and segregation of duties
B)physical access controls and password controls
C)validity checks and completeness checks
D)general controls and application controls

Question 39

There are two parts to business risk analysis: process analysis and industry analysis.

Question 40

Company-level controls can have a big impact on a company's financial reporting.

Question 41

According to the Criteria of Control Guidance on Control,what are four values and preferences of senior management that can greatly influence an organization?

Question 42

Define application controls and provide examples.

Question 43

Discuss four ways of managing risk in an organization.

Question 44

What is the connection between communication and internal control?

Question 45

Can an auditor place complete reliance on internal control to the exclusion of other audit procedures? Explain your answer using the audit risk model.

Question 46

What are four of the elements of the internal control environment?