Question 1

To learn more about a company and its inherent risks,auditors can use which of the following resources?

Accepted Answer

Auditors can use a variety of resources to learn more about a company and its inherent risks, including management inquiries, economic statistics, and online searches. A combination of all these resources could be used to get a comprehensive understanding of the company and its risks. Therefore, the best choice is D - Any of the above could be used.

Question 2

Which of the following would be a reason that industry and client data were not directly comparable?

Accepted Answer

Both broad industry and different accounting principles can affect the comparability of industry and client data. Therefore, both option A and B are correct.

Question 3

The quick ratio is useful for analyzing inventory accounts.

Accepted Answer

The quick ratio is designed to evaluate a company's ability to cover its short-term liabilities without relying on inventory sales, focusing on more liquid assets like cash, marketable securities, and receivables.

Question 4

If materiality judgments change during the audit opinion formulation process,what happens to previous audit decisions that were based on the evidence obtained using the initial materiality setting?

Accepted Answer

If materiality judgments change during the audit opinion formulation process, the auditor needs to reassess previous decisions made based on the initial materiality setting. The auditor needs to determine whether any misstatements previously considered immaterial based on the old materiality threshold are now material based on the new threshold. Therefore, the auditor needs to revise the audit procedures or audit opinion to reflect the revised materiality level.

Question 5

Which of the following factors will result in control risk being assessed at a higher level?

Accepted Answer

A lack of supervision of accounting personnel can lead to errors and fraud going undetected, increasing the likelihood of control risk being assessed at a higher level. Well-designed controls, well-trained accounting staff, and an effective control environment can help mitigate control risk.

Question 6

Detection risk is controllable by the client.

Accepted Answer

Detection risk is controlled by the auditor through the nature, timing, and extent of auditing procedures.

Question 7

Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Accepted Answer

Audit risk is defined as the risk that an auditor expresses an inappropriate audit opinion on financial statements that are materially misstated, which means that the financial statements contain significant errors or omissions that may affect the decisions of users of the financial statements. The level of audit risk depends on several factors such as the nature of the client's business, the complexity of the accounting and financial reporting systems, and the extent of the auditor's reliance on internal controls and other audit procedures to detect and prevent material misstatements. Therefore, it is important for auditors to carefully assess and manage audit risk to ensure that their audit opinions are reliable and credible.

Question 8

Which of the following ratios provides information about liquidity?

Accepted Answer

The current ratio is a liquidity ratio that measures a company's ability to pay its short-term liabilities with its short-term assets. A high current ratio indicates that a company has enough current assets to pay its short-term debts.

Question 9

Which item is correct concerning the risk of material misstatement?

Accepted Answer

The risk of material misstatement is primarily under the control of the client because it arises from the client's financial reporting process and the possibility that the financial statements may be materially misstated due to error or fraud. The auditor assesses this risk to plan the audit but cannot control it.

Question 10

If $15,000 is considered to be material to the income statement,but $25,000 is material to the balance sheet,the auditor should set overall materiality at which of the following dollar amounts?

Accepted Answer

The answer of If $15,000 is considered to be material...

Question 11

Which of the following factors would lead an auditor to assess inherent risk at a higher level?

Accepted Answer

A higher volume of nonroutine transactions increases the likelihood of error or fraud, leading to a higher inherent risk level. Option A is incorrect because an easily determinable account balance does not necessarily correlate with inherent risk. Option C is incorrect because simple transactions generally pose a lower inherent risk. Option D is incorrect because not all factors lead to a higher inherent risk level.

Question 12

Which of the following are common brainstorming session guidelines?

Accepted Answer

All three options (A, B, and C) are common brainstorming session guidelines. Freedom of expression is important so that all ideas can be heard without fear of judgment. Respectful communication creates a positive and welcoming environment where everyone's input is valued. Suspension of criticism allows participants to build on ideas and encourages creativity without shutting down potential solutions.

Question 13

What is the nature of the relationship between risk of material misstatement and audit risk?

Accepted Answer

The relationship between the risk of material misstatement and audit risk is inverse. As the risk of material misstatement increases, the auditor needs to reduce audit risk by performing more extensive audit procedures.

Question 14

Which of the following best describes year-to-year comparisons of account balances?

Accepted Answer

Year-to-year comparisons of account balances are best described as trend analyses because they involve analyzing changes in the account balance over time to identify patterns and trends. Time analyses refer to the analysis of trends over a specific time period or time frame. Reasonableness tests involve comparing account balances to what would be expected based on industry standards or previous performance. Ratio analyses involve comparing one financial metric to another to identify relationships and trends.

Question 15

Detection risk is affected by which aspects of substantive audit procedures?

Accepted Answer

Detection risk is affected by the nature, timing, and extent of substantive audit procedures. The nature refers to the type or method of procedure used, timing refers to when the procedure is performed, and extent refers to the amount of evidence obtained. All three aspects impact the level of detection risk, which is the risk that the auditor fails to detect material misstatements in the financial statements. Therefore, the correct answer is D, all of the above.

Question 16

Which of the following is a reason a predecessor auditor can decline to reply to a firm's current auditor?

Accepted Answer

If data is under court order or if the client does not approve of confidential information being shared, the predecessor auditor may decline to reply to a firm's current auditor. Therefore, both options A and C are correct. There may be other valid reasons for a predecessor auditor to decline to reply, but those are not given in the options. Option B is incorrect as there may be valid reasons for the predecessor auditor to decline to reply.

Question 17

Which of the following are two frequently used planning analytical procedures?

Accepted Answer

Ratio analyses and trend analyses are two frequently used planning analytical procedures. Ratio analyses involves the comparison of financial ratios over time and against industry benchmarks, while trend analyses involves the examination of patterns and developments in financial data over time. Both methods are important in forming a comprehensive understanding of a company's financial position and inform strategic planning decisions.

Question 18

Insistence from the CEO that she must be present at all meetings between the audit committee and internal/external auditors would cause auditors to assess inherent risk at a higher level.

Accepted Answer

If the CEO insists on being present at all meetings with auditors, auditors may perceive that she is attempting to interfere or influence the audit process, which can lead to an assessment of higher inherent risk. This is because the presence of management may limit the auditors' ability to perform their duties independently and objectively.

Question 19

Which of the following phrases or terms regarding materiality is used by the Supreme Court of the United States and is not found in FASB Concepts Statement No.2?

Accepted Answer

"significantly altered the total mix of information available" is a phrase used by the Supreme Court of the United States, but it is not found in FASB Concepts Statement No.2. The other options are all terms used in both sources.

Question 20

Which of the following best describes the misstatements identified throughout the audit that will be considered at the end of the audit in determining whether the financial statements overall are materially correct?

Accepted Answer

The answer of Which of the following best describes the...

Quiz 7: Planning the Audit: Identifying and Responding to the Risks of Material Misstatement