Question 1

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

Accepted Answer

Quality of earnings refers to a company's ability to continue earning at its current level, which is related to the sustainability of its earnings in the future. It is not related to the accuracy of net income calculation, agreement with analyst predictions, or the percentage of net income to total revenue.

Question 2

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

Accepted Answer

Enterprise resource planning systems (ERPs) are specifically designed to integrate different functional areas of an organization through a shared database and standardized processes. This makes them ideal for facilitating business process management. Management information systems (MIS), database management systems (DBMS), and web-based application systems can also play a role in business process management, but they are not designed specifically for this purpose like ERPs are.

Question 3

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

Accepted Answer

When assessing inherent risk related to an account balance, an auditor considers factors such as the nature of the account, potential for misstatements, and susceptibility to fraud. However, internal control policies and procedures are not explicitly considered at this stage. They are considered during the assessment of control risk, which is a separate step in the audit process.

Question 4

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

Accepted Answer

If the assessed level of control risk is increased, the auditor needs to use substantive testing to obtain sufficient appropriate audit evidence. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor should decrease detection risk to maintain the same level of overall audit risk. This can be achieved by increasing the level of substantive testing. Therefore, the best choice is to decrease detection risk by increasing substantive testing. Choice A is incorrect because decreasing substantive testing would result in a higher overall audit risk level, which is not desired. Choice C is incorrect because increasing inherent risk would also result in a higher overall audit risk level. Choice D is incorrect because increasing materiality levels would result in a lower overall audit risk level, which is not desired.

Question 5

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

Accepted Answer

The auditor likely concluded that the cost of obtaining additional evidence to further reduce control risk would not be justified by the benefits, indicating a cost-benefit decision rather than a judgment about the effectiveness of the internal control system itself.

Question 6

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.

Accepted Answer

Inherent risk is the probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements. This risk exists regardless of whether the client has effective internal control policies and procedures or whether the auditor detects the misstatements.

Question 7

Three key management assertions about items on the balance sheet are ________.
A) occurrence, completeness, and accuracy
B) classification, existence, and cut-off
C) confirmation, presentation, and disclosure
D) existence, completeness, and presentation

Accepted Answer

The three key management assertions about items on the balance sheet that are directly related to the balance sheet items are existence (asserting that assets, liabilities, and equity interests exist), completeness (asserting that all transactions and accounts that should be presented in the financial statements are so included), and presentation (asserting that items are disclosed, classified, and described in accordance with relevant financial reporting standards).

Question 8

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

Accepted Answer

Detection risk is the risk that an auditor's procedures will not detect a material misstatement that exists in an account balance. Therefore, the opposite of this is the risk that the procedures will lead to the conclusion that there is no misstatement when there actually is one, which is the definition of the answer choice D - detection risk.

Question 9

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

Accepted Answer

When control risk is assessed as higher due to ineffective controls, the auditor compensates by increasing the extent of substantive testing, such as tests of details, to gather sufficient evidence.

Question 10

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.

Accepted Answer

Business risk refers to any event, circumstance, or action that can make it more challenging for an organization to achieve its goals or objectives. This can include external factors such as changes in the market or the economy, as well as internal factors such as poor management decisions or ineffective processes. Business risk does not necessarily mean that the organization will become bankrupt or that its financial statements will be incorrect, although these outcomes can sometimes result from business risk.

Question 11

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

Accepted Answer

The business process view recognizes that there are differences in the technology used by different organizations, as this is a key factor in shaping their business processes. Option B is incorrect as it is not true that all organizations perform the same activities. Option C is also incorrect as simplifying business processes may not always be the best course of action, as it depends on the specific organization and industry. Option D is not necessarily true, as some organizations may work better with flatter organizational structures rather than hierarchies.

Question 12

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

Accepted Answer

Audit risk is the risk that an auditor may issue an inappropriate opinion on the financial statements, either due to errors or fraud, despite having conducted an audit in accordance with relevant auditing standards. It is the overall risk that the auditor is willing to accept that the financial statements may contain material misstatements that go undetected. Inherent risk, control risk, and detection risk are components of audit risk.

Question 13

An auditor begins the identification of business risks by doing what?
A) Preliminary analysis.
B) Financial analysis.
C) Strategic analysis.
D) Horizontal analysis.

Accepted Answer

Strategic analysis is the initial step in identifying business risks as it involves understanding the business environment, objectives, and strategies to identify potential risks that could impact the organization's ability to achieve its goals.

Question 14

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

Accepted Answer

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the risk that material misstatements exist in the financial statements. Control risk is the risk that a material misstatement will not be prevented or detected on a timely basis by the entity's internal control. By assessing control risk, the auditor can determine the extent of substantive tests needed to obtain reasonable assurance that the financial statements are free from material misstatement.

Question 15

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.

Accepted Answer

If control risk increases, detection risk must decrease to maintain the same level of audit risk, assuming inherent risk and audit risk remain constant.

Question 16

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

Accepted Answer

The statement that "the auditor obtains reasonable assurance about whether the financial statements are free of material misstatement" acknowledges the existence of audit risk. Audit risk arises because it is not possible for the auditor to provide absolute assurance that the financial statements are completely free from material misstatement, due to factors such as the limitations of audit procedures, the possibility of fraud or error, and the subjectivity involved in the exercise of professional judgment. The auditor can only provide reasonable assurance, which is a high but not absolute level of assurance, that the financial statements are free from material misstatement.

Question 17

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

Accepted Answer

The answer of Inherent risk and control risk differ from...

Question 18

The valuation assertion includes ________.
A) the measurement assumption used
B) ensuring all inventory is counted
C) making sure that all receivables relate to sales during the year
D) the method of presenting short-term and long-term liabilities

Accepted Answer

The valuation assertion is concerned with ensuring that assets, liabilities, and equity interests are included in the financial statements at appropriate amounts and any resulting valuation or allocation adjustments are appropriately recorded. It involves the measurement assumptions used in determining these amounts.

Question 19

The audit objective specifying that "all recorded assets, liabilities, and transactions represent real assets, liabilities, revenues, and expenses" is related most closely to which assertion(s)?
A) Existence or occurrence.
B) Rights and obligations.
C) Completeness.
D) Presentation and disclosure.

Accepted Answer

The audit objective of ensuring that recorded assets, liabilities, and transactions represent real ones directly links to the assertion of existence or occurrence. This assertion deals with verifying whether the transactions that the organization claims to have occurred actually took place, and whether the recorded assets and liabilities exist in reality. Therefore, it is the most closely related assertion to this audit objective among the given options.

Question 20

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

Accepted Answer

Detection risk is inversely related to the assurance provided by substantive tests because as the assurance from substantive tests increases, the detection risk decreases.

Quiz 6: Assessing Risks in an Audit Engagement

Quality of earnings refers to ________.

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

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

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 ________.

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 ________.

What is inherent risk?

Three key management assertions about items on the balance sheet are ________.

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 ________.

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 ________.

What is the definition of business risk?

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

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

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

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

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?

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

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

The valuation assertion includes ________.

The audit objective specifying that "all recorded assets, liabilities, and transactions represent real assets, liabilities, revenues, and expenses" is related most closely to which assertion(s) ?

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