Question 1

Engagement risk is:
A) the risk of issuing an incorrect auditor's opinion.
B) the auditor's risk of loss from events arising in connection with the financial report audited and reported upon.
C) the overall risk of material misstatements.
D) the risk of entity financial failure.

Accepted Answer

Engagement risk refers to the risk the auditor faces of suffering a loss or damage from events associated with the financial statements they have audited and reported on. This could include damage to their professional reputation, legal liability, or financial loss, but it is not directly related to the risk of issuing an incorrect opinion, the risk of material misstatement, or the risk of the entity's financial failure.

Question 2

Auditors can eliminate engagement risk:
A) under no circumstances.
B) by establishing policies for client acceptance and continuance.
C) by lowering audit risk.
D) by lowering materiality.

Accepted Answer

Engagement risk cannot be eliminated entirely, as it is inherent in the nature of audit work. Policies for client acceptance and continuance, lowering audit risk, and lowering materiality can help manage but not eliminate engagement risk.

Question 3

The extent of substantive tests for an assertion in relation to the assessed level of inherent risk varies in a relationship that is ordinarily:
A) opposite.
B) inverse.
C) direct.
D) unequal.

Accepted Answer

The extent of substantive tests for an assertion is directly related to the assessed level of inherent risk. This means that the higher the level of inherent risk, the more extensive the substantive tests should be. Conversely, if the level of inherent risk is low, the extent of substantive tests can be reduced. Therefore, the relationship between the two is direct.

Question 4

Which of the following would be least likely to be included in an auditor's test of controls?
A) Observation.
B) Inquiry.
C) Confirmation.
D) Inspection.

Accepted Answer

Confirmation is typically not a test of controls, but rather a substantive procedure used to gather evidence about account balances or transactions. The other options (observation, inquiry, and inspection) are commonly used to test controls.

Question 5

All of the following are substantive tests except:
A) analytical procedures.
B) tests of approvals on invoices.
C) direct tests of sales transactions.
D) confirmation of bank balances at year-end.

Accepted Answer

Tests of approvals on invoices are considered tests of controls, not substantive tests. Substantive tests are designed to detect material misstatements in financial statements, while tests of controls assess the effectiveness of internal controls.

Question 6

As the acceptable level of detection risk decreases, an auditor may change the:
A) timing of substantive tests by performing them at an interim date rather than at year-end.
B) nature of substantive tests from less effective to more effective procedures.
C) timing of tests of controls by performing them at several dates rather than at one time.
D) assessed level of inherent risk to a higher amount.

Accepted Answer

As the acceptable level of detection risk decreases, the auditor may need to perform more effective procedures to increase the assurance obtained from the procedures. This may involve a change in the nature of substantive tests from less effective to more effective procedures to obtain sufficient evidence. The timing of tests of controls and substantive tests may also change, but the assessed level of inherent risk would not necessarily increase as a result.

Question 7

Which of the following best describes the concept of audit risk?
A) The risk of the auditor being sued because of association with an audit client.
B) The risk that the auditor will provide an unmodified opinion on a materially misstated financial report.
C) The overall risk that a material misstatement exists in the financial report.
D) The risk that auditors use audit procedures that are inappropriate.

Accepted Answer

Audit risk is the risk that the auditor expresses an unmodified (clean) opinion on the financial statements when, in fact, there is a material misstatement present. This risk encompasses the possibility of not detecting errors or frauds that could impact the financial statements significantly.

Question 8

As the acceptable level of detection risk increases, an auditor may change the:
A) assessed level of control risk from less than high to high.
B) assurance provided by tests of controls by using a larger sample size than planned.
C) timing of substantive tests from year-end to an interim date.
D) nature of substantive tests from less effective to more effective procedures.

Accepted Answer

Increasing the acceptable level of detection risk allows an auditor to perform substantive tests at an interim date rather than at year-end, as the auditor is willing to accept a higher risk that the procedures will not detect a material misstatement.

Question 9

The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process.In regard to minimising this risk, the auditor primarily relies on:
A) substantive tests.
B) tests of controls.
C) internal control.
D) statistical analysis.

Accepted Answer

Substantive tests are tests designed to detect material misstatements in the financial statements, and are the primary tool used by auditors to minimize the risk of undetected misstatements. Tests of controls are focused on the effectiveness of internal control, which may indirectly help to reduce the risk of material misstatements, but are not the primary tool used for this purpose. Internal control is important for ensuring the accuracy of financial reporting, but may not always be effective at preventing or detecting all material misstatements. Statistical analysis can be a useful tool for auditors in certain situations, but is not typically used as the primary means of detecting material misstatements.

Question 10

Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?
A) Documents mailed by outsiders to the auditor.
B) Correspondence between the auditor and suppliers.
C) Sales invoices inspected by the auditor.
D) Calculations made by the auditor.

Accepted Answer

The answer of Audit evidence can come in different forms...

Question 11

'Dual-purpose tests' is a term used for:
A) tests of controls that address both the design of the control procedures and their operating effectiveness.
B) tests of transactions that include substantive procedures as well as tests of controls.
C) tests that address both balances and transaction classes.
D) tests performed because of client expectations as well as for gathering audit evidence.

Accepted Answer

Dual-purpose tests refer to tests of transactions that include both substantive procedures (to test for completeness, accuracy, and validity of transactions) and tests of controls (to evaluate the effectiveness of control procedures). The purpose of such tests is to reduce the amount of audit work needed, save time and resources, and increase audit efficiency. Therefore, option B is the most suitable choice for the question.

Question 12

Which of the following is intended to detect deviations from prescribed Accounting Department procedures?
A) Substantive tests specified by a standardised audit program.
B) Tests of controls designed specifically for the client.
C) Analytical tests as designed in the industry audit guide.
D) Computerised analytical tests tailored for the configuration of CIS equipment in use.

Accepted Answer

Tests of controls are designed specifically for the client's procedures and are intended to identify when deviations occur. Substantive tests (A) are intended to identify errors or misstatements in account balances or transactions. Analytical tests (C) are used to compare financial information to industry standards or prior periods to identify significant fluctuations or anomalies. Computerized analytical tests (D) are not necessarily specific to detecting deviations from prescribed procedures.

Question 13

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 report audit.
D) can be changed at the auditor's discretion.

Accepted Answer

Inherent risk and control risk are inherent in the nature of the client's operations and financial reporting, while detection risk is related to the effectiveness of audit procedures. In other words, inherent risk and control risk exist regardless of the auditor's activities, while detection risk can be influenced by the auditor's decisions and actions. Therefore, option C is the correct answer as it highlights the independent nature of inherent and control risk.

Question 14

As the acceptable level of detection risk decreases, an auditor may change the:
A) timing of substantive tests by performing them at an interim date rather than at balance date.
B) assessed level of inherent risk to a higher amount.
C) timing of tests of controls by performing them at several dates rather than at one time.
D) nature of substantive tests from a less effective to a more effective procedure.

Accepted Answer

As the acceptable level of detection risk decreases, the auditor needs to increase the nature, timing, or extent of substantive testing to achieve the same level of assurance. Therefore, the nature of substantive tests may change from a less effective to a more effective procedure. The assessed level of inherent risk should not be changed in response to the level of detection risk, and the timing of tests of controls should be determined based on the auditor's understanding of the entity's internal control.

Question 15

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 a misstatement does exist is:
A) audit risk.
B) detection risk.
C) control risk.
D) inherent risk

Accepted Answer

The risk described in the question is detection risk. Detection risk is the risk that an auditor's procedures will not detect a material misstatement. The other options, audit risk, control risk, and inherent risk, are not directly related to this specific scenario.

Question 16

Which of the following statements concerning the auditor's use of the work of an expert is correct?
A) If the auditor believes that the determinations made by the expert are unreasonable, only an adverse opinion may be issued.
B) If the expert is related to the client, the auditor is not permitted to use the expert's findings as corroborative evidence.
C) The expert should be identified in the auditor's report if the auditor has relied on the expert in issuing an unmodified auditor's opinion.
D) The expert should have an understanding of the auditor's corroborative use of the expert's findings.

Accepted Answer

The expert should have an understanding of how their findings will be used by the auditor to corroborate the audit evidence.

Question 17

The risk that an auditor will conclude, based on substantive tests, that a material error does not exist in an account balance when, in fact, such error does exist is referred to as:
A) sampling risk.
B) detection risk.
C) non-sampling risk.
D) inherent risk.

Accepted Answer

Detection risk refers to the risk that the auditor will fail to detect a material misstatement in an account balance. It is one of the components of audit risk, along with inherent risk and control risk. The risk that an auditor will conclude, based on substantive tests, that a material error does not exist in an account balance when, in fact, such error does exist is an example of detection risk.

Question 18

The situation and circumstances can dictate the level of certain risks no matter what the auditor does. However, the auditor is always able to decide to reduce one of the following risks:
A) control risk.
B) risk of management fraud.
C) detection risk.
D) inherent risk.

Accepted Answer

The auditor can only control the detection risk by adjusting the nature, timing, and extent of substantive procedures. Control risk, risk of management fraud, and inherent risk are all determined by factors outside the auditor's control, such as the effectiveness of internal controls and the integrity of management.

Question 19

As the acceptable level of detection risk decreases, the assurance directly provided from:
A) substantive tests should increase.
B) substantive tests should decrease.
C) tests of controls should increase.
D) tests of controls should decrease.

Accepted Answer

As the acceptable level of detection risk decreases, the assurance directly provided from substantive tests should increase. This is because substantive tests are focused on detecting material misstatements in the financial statements, and a lower detection risk implies a greater need for assurance on the accuracy and completeness of the financial statements. Therefore, the auditor should perform more extensive substantive procedures to reduce the risk of material misstatement to an acceptable level.

Question 20

Which of the following audit risk components may be assessed in non-quantitative terms? Control risk
Detection risk
Inherent risk
A) Yes
Yes
Yes
B) Yes
No
Yes
C) Yes
Yes
No
D) No
Yes
Yes

Accepted Answer

Control risk and inherent risk may be assessed in non-quantitative terms.

Quiz 5: Overview of Elements of the Financial Report Audit Process

Engagement risk is:

Auditors can eliminate engagement risk:

The extent of substantive tests for an assertion in relation to the assessed level of inherent risk varies in a relationship that is ordinarily:

Which of the following would be least likely to be included in an auditor's test of controls?

All of the following are substantive tests except:

As the acceptable level of detection risk decreases, an auditor may change the:

Which of the following best describes the concept of audit risk?

As the acceptable level of detection risk increases, an auditor may change the:

The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process.In regard to minimising this risk, the auditor primarily relies on:

Audit evidence can come in different forms with different degrees of persuasiveness. Which of the following is the least persuasive type of evidence?

'Dual-purpose tests' is a term used for:

Which of the following is intended to detect deviations from prescribed Accounting Department procedures?

Inherent risk and control risk differ from detection risk in that they:

As the acceptable level of detection risk decreases, an auditor may change the:

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 a misstatement does exist is:

Which of the following statements concerning the auditor's use of the work of an expert is correct?

The risk that an auditor will conclude, based on substantive tests, that a material error does not exist in an account balance when, in fact, such error does exist is referred to as:

The situation and circumstances can dictate the level of certain risks no matter what the auditor does. However, the auditor is always able to decide to reduce one of the following risks:

As the acceptable level of detection risk decreases, the assurance directly provided from:

Which of the following audit risk components may be assessed in non-quantitative terms? Control risk Detection risk Inherent risk