Question 1

You are teaching a class of new hires at your international accounting firm. Explain the audit risk model using a mathematical formula.

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The answer of You are teaching a class of new...

Question 2

Which of the following is correct concerning required auditor communications about fraud?

Accepted Answer

According to the professional standards, if the auditor becomes aware of fraud that involves senior management, they should report it directly to the audit committee regardless of the amount involved. This is in order to ensure that appropriate action is taken and to maintain independence from senior management.

Question 3

In one sentence each, define misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets.

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The answer of In one sentence each, define misstatements arising...

Question 4

Your classmate asserts, "Accountants shouldn't need to take business courses besides accounting, because they are only interested in the financial statements of a company." Defend or refute this statement.

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The answer of Your classmate asserts, "Accountants shouldn't need to...

Question 5

The objectives of the engagement partner's communication with the audit team include

Accepted Answer

The engagement partner's communication with the audit team should emphasize the importance of professional skepticism, which is necessary for the audit team to have an objective and critical mindset when performing the audit. Options A, B, and C are not the objectives of the engagement partner's communication with the audit team.

Question 6

The auditor is most likely to presume that a high risk of a fraud exists if

Accepted Answer

Inadequate segregation of duties places an employee in a position to perpetrate and conceal theft, and is a key factor in creating a high risk of fraud. The other options may increase the complexity of the audit or increase the risk of errors or irregularities, but do not necessarily indicate a high risk of fraud.

Question 7

Assume that you are the new audit senior on the LV Drug Corporation (LVD) engagement. LVD is a pharmaceutical company that has three successful drugs and a number of drugs in progress in its research and development pipeline. You are considering your audit plan and it is important to identify the inherent risks that LVD has and how they relate to the planning process.
Required:
For each of the following factors, indicate whether it will tend to increase, decrease, or have no effect on inherent risk, and the reasoning for your answer.
a. Dr. Jones is the major shareholder of LVD and its CEO.
b. Your firm has audited LVD for the last four years.
c. There has been high turnover of key accounting personnel during the last two years.
d. The internal audit function reports to the audit committee.
e. LVD has been the subject of lawsuits by users of Framadon who claim that the drug affects their liver functions. LVD is confident that there are no such side effects from the use of Framadon.

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The answer of Assume that you are the new audit...

Question 8

Stacey, the partner in charge of the audit of RIF Enterprises, sets the planned level of audit risk for the audit of accounts payable at .06. The risk of material misstatement is assessed at .65. What is the detection risk for this audit?

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The answer of Stacey, the partner in charge of the...

Question 9

A properly planned and performed audit may fail to detect a material misstatement resulting from fraud because

Accepted Answer

Fraud can be concealed through collusion, which may make even effective audit procedures ineffective. Therefore, even a properly planned and performed audit may fail to detect a material misstatement resulting from fraud.

Question 10

During the course of the audit of FF Financial, you find that some accounting entries have been altered. You believe this may be the result of management fraud and you have determined that the effect of this could be material to the financial statements. What steps should you take in response to the accounting entries and your concern about management fraud?

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The answer of During the course of the audit of...

Question 11

You are the senior on an audit of Two Be Gone, a large public company. The company recently completed an acquisition of its fifth largest competitor. What risks might this present? How will you, the auditor, respond to these risks (i.e. what actions should you take)?

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The answer of You are the senior on an audit...

Question 12

What is the difference between audit risk and engagement risk?

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The answer of What is the difference between audit risk...

Question 13

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

Accepted Answer

Inability to generate cash flows from operations while reporting substantial earnings growth indicates potential manipulation of financial statements to create a false picture of the company's financial health, which is a red flag for fraudulent financial reporting. The other choices do not necessarily indicate a heightened risk of fraudulent financial reporting.

Question 14

Using the audit risk model, identify the relationship between the following elements. For each of the items below, highlight whether the two elements have an inverse relationship, a direct relationship, or no relationship. When considering each item, assume that the other components of the risk model remain constant.

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The answer of Using the audit risk model, identify the...

Question 15

DATRIX, Inc., a Fortune 500 company, has been experiencing poor performance. Industry analysts have been issuing negative reports and the company's stock price has been steadily declining. As an auditor, what would concern you about the audit engagement of DATRIX, Inc.

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The answer of DATRIX, Inc., a Fortune 500 company, has...

Quiz 4: Risk Assessment