Question 1

Which of the following is not a fraud risk factor?
A)Amount of ethics training provided by the company
B)An incentive or pressure to commit fraud
C)An opportunity to commit fraud
D)Rationalization to justify fraudulent actions

Accepted Answer

The amount of ethics training provided by the company is not a fraud risk factor as it is a preventive measure that can mitigate the risk of fraud. The other options are all established fraud risk factors: B) An incentive or pressure to commit fraud can motivate individuals to engage in fraudulent behavior, C) an opportunity to commit fraud refers to situations where weaknesses in the control environment or lack of oversight allow fraud to occur, and D) rationalization to justify fraudulent actions is a common psychological driver for fraud perpetrators to justify their actions.

Question 2

Timing differences such as bringing forward the recognition of revenues and delaying the recognition of expenses is an example of _______.
A)fraudulent financial reporting
B)performance materiality
C)planning materiality
D)balance sheet benchmarks

Accepted Answer

Bringing forward the recognition of revenues and delaying the recognition of expenses is a common tactic in fraudulent financial reporting, also known as earnings management or manipulation. This can be done to artificially inflate revenue and profit figures, which is unethical and often illegal. The other choices - performance materiality, planning materiality, and balance sheet benchmarks - are not directly related to timing differences in revenue and expense recognition.

Question 3

In the substantive approach, if there is no internal control in place, the auditors _______.
A)assess RMM as high since both inherent and control risk are high
B)assess inherent and detective risk as high
C)assess control and detective risk as high
D)issue a qualified opinion

Accepted Answer

In the substantive approach, if there is no internal control in place, auditors assess the Risk of Material Misstatement (RMM) as high because both inherent risk (the susceptibility of an assertion to a material misstatement, assuming there are no related controls) and control risk (the risk that a misstatement that could occur in an assertion and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control) are considered high. This is because the absence of internal controls increases the likelihood of errors or fraud going undetected.

Question 4

How are components of the audit risk model rearranged to solve for detection risk?
A)DR = AR ÷ RMM
B)DR = AR + RMM
C)DR = AR - RMM
D)DR = AR x RMM

Accepted Answer

Detection risk can be solved for by rearranging the audit risk model formula: AR = IR x CR x DR. To solve for DR, we can rearrange the formula as DR = AR ÷ (IR x CR). Given that RMM = IR x CR, we can substitute RMM for (IR x CR) in the formula and get DR = AR ÷ RMM. Therefore, the correct answer is A.

Question 5

The process used when developing an audit strategy at the account or assertion level begins with identifying inherent risks at the account or assertion level.The second step is to _______.
A)determine whether an internal control can mitigate the risk factor
B)increase the extent of detailed substantive procedures performed at year-end
C)perform less extensive detailed substantive procedures at interim
D)determine whether insurance can be purchased to eliminate internal controls

Accepted Answer

The second step in developing an audit strategy at the account or assertion level is to determine whether an internal control can mitigate the identified inherent risks. This involves an evaluation of the design and operating effectiveness of the control, as well as any potential limitations or deficiencies in the control. Based on this analysis, the auditor can decide whether to rely on the control to reduce the assessed risk of material misstatement or to perform additional substantive procedures. The other options (B, C, and D) are not the typical second step in developing an audit strategy and are not relevant to mitigating inherent risks.

Question 6

Substantive procedures are designed to _______.
A)detect material misstatements at the assertion level
B)evaluate the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level
C)determine the quantity of audit procedures to be performed
D)determine when the audit procedures will be performed

Accepted Answer

Substantive procedures are performed to detect material misstatements at the assertion level. These procedures provide evidence for the auditor to support or refute the assertions made by the management in the financial statements.

Question 7

The general type of fraud that involves some form of theft is typically known as _______.
A)misappropriation of assets
B)improper asset valuation
C)fictitious sales
D)unrecorded liabilities

Accepted Answer

Misappropriation of assets involves stealing or misusing an organization's assets for personal gain, which is a form of theft. The other options involve misrepresenting financial information, but do not necessarily involve theft.

Question 8

An example of fraudulent financial reporting is _______.
A)timing differences such as bringing forward the recognition of revenues and delaying the recognition of expenses
B)writing checks to fictitious vendors
C)using company cars for personal use
D)theft of inventory by employees

Accepted Answer

Fraudulent financial reporting often involves manipulation of the company's financial records to present a more favorable financial position than actually exists. Bringing forward the recognition of revenues and delaying the recognition of expenses can artificially inflate a company's profits, making it a form of fraudulent financial reporting. Choices B, C, and D describe other types of fraud or misuse of company assets but do not directly relate to the manipulation of financial statements.

Question 9

Suppose auditors assess inherent risk and control risk as low, 25% and 8% respectively.If auditors want to keep audit risk relatively low at 5%, then what is detection risk?
A)2.50 or 250%
B).02 or 2%
C).05 or 5%
D)2.00 or 200%

Accepted Answer

Detection risk is calculated as follows:Detection risk = Audit risk / (Inherent risk x Control risk)Detection risk = 5% / (25% x 8%)Detection risk = 5% / 2%Detection risk = 2.50 or 250%

Question 10

Detection of fraud refers to _______.
A)the use of controls and procedures aimed at uncovering a fraud should one occur
B)the use of controls and procedures aimed at avoiding a fraud
C)auditors who assess fraud risk factors
D)incentives to commit fraud

Accepted Answer

Detection of fraud involves using controls and procedures that are designed to uncover any fraudulent activity that may occur. This can include procedures such as reviewing financial statements, conducting internal audits, reviewing employee transactions, and implementing fraud prevention strategies. The objective is to identify fraud early on, before it can cause significant damage to the organization.

Question 11

A detection risk of 1.5 or 150% means _______.
A)there would be a 150% risk that the auditors' procedures will not be effective in detecting a material misstatement
B)auditors will need to undertake 1.5 times the audit procedures planned in the initial stages of the audit
C)there would be a 150% risk that the auditors' procedures will be effective in detecting a material misstatement
D)auditors will perform extensive detailed testing of related account balances and use larger sample sizes because a 1.5 detection risk is a low detection risk

Accepted Answer

A detection risk of 1.5 or 150% means that there is a 150% risk that the auditors' procedures will not be effective in detecting a material misstatement. This means that there is lower assurance that the financial statements are free from material misstatements. In such a situation, auditors may increase their audit procedures, such as performing more extensive testing or using larger sample sizes, to reduce the risk of not detecting material misstatements.

Question 12

Where does the responsibility for preventing and detecting fraud rest?
A)With client management and those charged with governance
B)With the auditors
C)Solely with the CEO
D)Solely with the CFO

Accepted Answer

The primary responsibility for preventing and detecting fraud rests with client management and those charged with governance, such as the board of directors. Auditors also have a responsibility to assess and respond to the risk of fraud, but they cannot be solely relied upon to prevent or detect fraud. It is not solely the responsibility of the CEO or CFO, as fraud prevention and detection involves the efforts of an entire organization.

Question 13

Auditors want a low audit risk of 5% and a low detection risk of 5%.In order to achieve this, what will inherent risk and control risk have to be?
A)100% for both
B)1% for inherent risk and 100% for control risk
C)1% for both
D)The risks cannot be determined because there is not enough information.

Accepted Answer

Inherent risk and control risk must be 100% for both to achieve a low audit risk of 5% and a low detection risk of 5%, as audit risk is a product of inherent risk, control risk, and detection risk.

Question 14

The general type of fraud that involves intentionally misstating items or omitting important facts from the financial statements is typically known as _______.
A)fraudulent financial reporting
B)writing checks to fictitious vendors
C)using company cars for personal use
D)theft of inventory by employees

Accepted Answer

Fraudulent financial reporting involves intentionally misstating items or omitting important facts from the financial statements, which can be done through a variety of methods including manipulation of accounting records, providing misleading disclosures, and intentional misapplication of accounting principles. Writing checks to fictitious vendors, using company cars for personal use, and theft of inventory by employees are all examples of other types of fraud that may occur within a company.

Question 15

A team of auditors is gathering less evidence than is necessary, or evidence that is the easiest to obtain, rather than obtain evidence that is the most reliable and relevant.Such a lack of professional skepticism could be indicative of the team's ______.
A)workload
B)culture
C)size
D)monitoring

Accepted Answer

The answer of A team of auditors is gathering less...

Question 16

Auditors can control detection risk by _______.
A)planning to perform more or less detailed audit procedures
B)planning to perform more or less audit procedures on controls
C)designing internal controls for the client
D)designing the software processes that the client uses to process accounting information

Accepted Answer

Auditors can control detection risk by planning to perform more or less detailed audit procedures, which helps them gather sufficient appropriate evidence to detect material misstatements.

Question 17

In the substantive approach, if there is an internal control in place, the auditors may _______.
A)test the effectiveness of the internal control
B)issue a qualified opinion
C)assess all procedures in the audit as having high audit risk
D)withdraw from the audit

Accepted Answer

In the substantive approach, auditors may test the effectiveness of the internal control if it is in place. This is done to gain assurance that the controls are functioning as intended and to determine the extent to which reliance can be placed on them for the audit. Therefore, choice A is the best answer. Choice B is incorrect because issuing a qualified opinion is not necessarily based on the presence or absence of internal controls. Choice C is incorrect as evaluating audit risk is a separate concept from testing internal controls. Choice D is incorrect as withdrawal from the audit is a serious action that should be taken only in extreme circumstances, and the presence of internal controls is not a sufficient reason for withdrawal.

Question 18

In the context of identifying fraud, which of the following describes theft of inventory by employees or others?
A)Misappropriation of assets
B)Fraudulent financial reporting
C)A loss that is not the result of fraud
D)Cooking the books

Accepted Answer

The theft of inventory by employees or others is a type of misappropriation of assets, which is a common form of fraud. Misappropriation of assets involves the theft or misuse of a company's resources, such as cash or inventory, by employees or others with access to those resources. This is different from fraudulent financial reporting, which involves manipulating financial statements to make a company look more profitable than it actually is. "Cooking the books" is another term for fraudulent financial reporting. A loss that is not the result of fraud would be a legitimate loss, such as losses incurred as part of normal business operations.

Question 19

Prevention of fraud refers to _______.
A)the use of controls and procedures aimed at avoiding a fraud
B)the use of controls and procedures aimed at uncovering a fraud should one occur
C)auditors who assess fraud risk factors
D)incentives to commit fraud

Accepted Answer

Prevention of fraud involves implementing controls and procedures that are designed to avoid fraud from occurring in the first place. This can include things like implementing strong internal controls, conducting thorough background checks on employees, and providing fraud awareness training for all staff. By taking these steps, organizations can minimize the risk of fraudulent activities occurring within their operations.

Question 20

An example of misappropriation of assets is _______.
A)employees remaining on the payroll after ceasing employment
B)improper asset valuation
C)fictitious sales
D)unrecorded liabilities

Accepted Answer

Employees remaining on the payroll after ceasing employment is an example of misappropriation of assets, as it involves the unauthorized use of company resources for personal gain.

Quiz 3: Risk Assessment Part Iaudit Risk and Audit Strategy

Which of the following is not a fraud risk factor?

Timing differences such as bringing forward the recognition of revenues and delaying the recognition of expenses is an example of _______.

In the substantive approach, if there is no internal control in place, the auditors _______.

How are components of the audit risk model rearranged to solve for detection risk?

The process used when developing an audit strategy at the account or assertion level begins with identifying inherent risks at the account or assertion level.The second step is to _______.

Substantive procedures are designed to _______.

The general type of fraud that involves some form of theft is typically known as _______.

An example of fraudulent financial reporting is _______.

Suppose auditors assess inherent risk and control risk as low, 25% and 8% respectively.If auditors want to keep audit risk relatively low at 5%, then what is detection risk?

Detection of fraud refers to _______.

A detection risk of 1.5 or 150% means _______.

Where does the responsibility for preventing and detecting fraud rest?

Auditors want a low audit risk of 5% and a low detection risk of 5%.In order to achieve this, what will inherent risk and control risk have to be?

The general type of fraud that involves intentionally misstating items or omitting important facts from the financial statements is typically known as _______.

A team of auditors is gathering less evidence than is necessary, or evidence that is the easiest to obtain, rather than obtain evidence that is the most reliable and relevant.Such a lack of professional skepticism could be indicative of the team's ______.

Auditors can control detection risk by _______.

In the substantive approach, if there is an internal control in place, the auditors may _______.

In the context of identifying fraud, which of the following describes theft of inventory by employees or others?

Prevention of fraud refers to _______.

An example of misappropriation of assets is _______.