Question 1

One way to think of an accounting process is as a cycle.The idea of a cycle reflects that ________.
A)transactions have to undergo a series of procedures before being recorded in the accounts
B)transactions are not complete until they are recorded
C)there is a set of accounts that record transaction information from the same business process
D)every business process results in the start of another process

Accepted Answer

The answer of One way to think of an accounting...

Question 2

The audit objective related to existence is to obtain evidence that the asset,liability or equity exists physically or legally.

Accepted Answer

The audit objective related to existence is indeed to obtain evidence that the asset, liability or equity exists physically or legally. This means verifying that the item in question is a real or tangible asset or has a clear legal basis, rather than being a fabricated or fake entity. The auditor will typically examine supporting documents, perform physical inspections, and other tests to confirm the existence of the item under review.

Question 3

An organization with a very hierarchical structure is typical of companies in complex business environments as this structure reduces the ability of a junior employee to make a wrong decision.

Accepted Answer

The answer of An organization with a very hierarchical structure...

Question 4

To help achieve good governance,international best practice recommends all but which of the following be implemented?
A)A majority the members of the board of directors should not hold management positions.
B)Create an independent audit committee to oversee the financial reporting process.
C)Require the internal audit team report directly to management.
D)Have a compensation committee that aligns management rewards with shareholder interests.

Accepted Answer

International best practice recommends that the internal audit team should report directly to the board of directors or an independent audit committee, not to management. This helps to ensure the independence and objectivity of the internal audit function. Therefore, requiring the internal audit team to report directly to management goes against this recommendation. A, B, and D are all recommended best practices for achieving good governance.

Question 5

There are two parts to business risk analysis: process analysis and industry analysis.

Accepted Answer

Business risk analysis typically involves several components beyond just process analysis and industry analysis, including financial analysis, market analysis, and environmental analysis, among others.

Question 6

As control risk gets smaller,audit risk gets larger,assuming all other risks stay constant.

Accepted Answer

Audit risk is a function of inherent risk, control risk, and detection risk. If control risk decreases (meaning controls are more effective), and all other risks stay constant, the overall audit risk would actually decrease, not increase, because there is less risk of material misstatement going undetected.

Question 7

Auditors do not create or control detection risk;they can only try to assess its magnitude.

Accepted Answer

The answer of Auditors do not create or control detection...

Question 8

Control risk is the probability that audit procedures will fail to detect material misstatements in the financial statements.

Accepted Answer

Control risk is the risk that a misstatement that could occur in an account balance or class of transactions and that could be material, either individually or when aggregated with misstatements in other balances or classes, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control. Audit procedures are designed to test the effectiveness of these controls, not the probability of their failure.

Question 9

A completeness error occurs when an account balance is overstated.

Accepted Answer

A completeness error occurs when an account balance is understated, not overstated. It means that something has been left out of a financial statement, making it incomplete.

Question 10

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

Inherent risk and control risk exist independently of the financial statement audit, whereas detection risk is related to the auditor's procedures and can be influenced by the auditor.

Question 11

Control testing procedures provide no direct evidence of material misstatements in the auditee's statements

Accepted Answer

Control testing procedures are designed to evaluate the effectiveness of internal control over financial reporting, but they do not provide direct evidence of material misstatements in the auditee's statements. This is because they focus on the design and implementation of controls rather than the actual occurrence of misstatements. Auditors must perform substantive testing to obtain direct evidence of material misstatements.

Question 12

The only component of audit risk that the auditor can directly influence is detection risk.

Accepted Answer

Detection risk is the risk that the auditor will not detect a material misstatement that exists in an assertion. Unlike inherent risk and control risk, which are primarily influenced by the client and its environment, detection risk can be managed by the auditor through the nature, timing, and extent of auditing procedures.

Question 13

Business processes can be thought of as a structured set of activities within an entity.

Accepted Answer

Business processes are indeed a structured set of activities within an entity, designed to achieve a particular goal or objective. These activities may involve multiple departments, individuals, and systems, and are typically built to follow a specific sequence or workflow. The ultimate aim of business processes is to optimize organizational efficiency, reduce costs, and improve customer satisfaction.

Question 14

Which of the following statements best describes the relationship between materiality and audit risk?
A)Both materiality and audit risk are directly related to the planned level of substantive procedures to be performed.
B)Materiality and audit risk are assessed independently of each other.
C)A higher assessed materiality level results in a higher assessed audit risk level.
D)A lower assessed materiality level results in a higher assessed audit risk level.

Accepted Answer

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

Question 15

Which of the following statements concerning the audit risk model is false?
A)It is used to determine the planned level of substantive audit testing to be performed in the audit.
B)It is useful as a planning tool at the beginning of the audit.
C)It is applied at both the financial statement and individual account and financial statement assertion levels.
D)It allows the auditor to accurately quantify the level of audit risk.

Accepted Answer

The audit risk model does not allow the auditor to accurately quantify the level of audit risk as it is based on estimates and judgment. The model is used to plan the level of substantive audit testing, assess the risk of material misstatement, and determine the nature, timing, and extent of audit procedures.

Question 16

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 17

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 18

Detection risk is the probability that audit procedures will produce evidence of material misstatements.

Accepted Answer

Detection risk is the risk that the auditors fail to detect a material misstatement that exists in a financial statement.

Question 19

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 inherent risk to offset the increased control risk level
B)decrease detection risk and increase planned substantive audit procedures
C)increase inherent risk and decrease planned substantive audit procedures
D)increase materiality levels

Accepted Answer

If the auditor decides to increase the assessed level of control risk, they must make adjustments to the planned level of detection risk or assessed level of inherent risk. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would decrease detection risk and increase planned substantive audit procedures. This will compensate for the increase in control risk and ensure that the overall audit risk remains at the planned level. Decreasing inherent risk or increasing materiality levels would not be a suitable solution in this scenario.

Question 20

An auditor considers two factors in understanding business risks.What are they?
A)The likelihood of a risk occurring and the materiality of the risk.
B)The magnitude of the risk and the type of risk.
C)The likelihood of the risk occurring and the type of risk.
D)The likelihood of a risk occurring and the magnitude the risk.

Accepted Answer

Auditors assess business risks by considering the likelihood of a risk occurring and the magnitude of the risk, as these factors help determine the potential impact on financial statements.

Quiz 6: Assessing Risks in an Audit Engagement

One way to think of an accounting process is as a cycle.The idea of a cycle reflects that ________.

The audit objective related to existence is to obtain evidence that the asset,liability or equity exists physically or legally.

An organization with a very hierarchical structure is typical of companies in complex business environments as this structure reduces the ability of a junior employee to make a wrong decision.

To help achieve good governance,international best practice recommends all but which of the following be implemented?

There are two parts to business risk analysis: process analysis and industry analysis.

As control risk gets smaller,audit risk gets larger,assuming all other risks stay constant.

Auditors do not create or control detection risk;they can only try to assess its magnitude.

Control risk is the probability that audit procedures will fail to detect material misstatements in the financial statements.

A completeness error occurs when an account balance is overstated.

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

Control testing procedures provide no direct evidence of material misstatements in the auditee's statements

The only component of audit risk that the auditor can directly influence is detection risk.

Business processes can be thought of as a structured set of activities within an entity.

Which of the following statements best describes the relationship between materiality and audit risk?

Which of the following statements concerning the audit risk model is false?

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 ________.

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

Detection risk is the probability that audit procedures will produce evidence of material misstatements.

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 ________.

An auditor considers two factors in understanding business risks.What are they?