Question 1

In accounting, "year-end" is typically the period _______.

Accepted Answer

Year-end is typically the period when the client's accounting year has substantially finished, and the account balances reflect the totals for the entire year under audit. It is the point when auditors can start reviewing the year's financial transactions, collecting evidence, and compiling the financial statements.

Question 2

If RMM is low, auditors are much more likely to perform substantive procedures for balance sheet accounts ______.

Accepted Answer

When the risk of material misstatement (RMM) is low, auditors may perform substantive procedures earlier, such as one or two months prior to year-end, as there is less concern about significant changes occurring before the financial statements are finalized.

Question 3

An audit plan details the nature, extent, and timing of audit procedures to be performed.The "extent" of audit procedures is best defined as _______.

Accepted Answer

The "extent" of audit procedures refers to how much testing will be done, i.e. the scope and depth of the audit procedures.

Question 4

The risk of material misstatement is a function of _______.

Accepted Answer

The risk of material misstatement is a function of inherent risk and control risk. Inherent risk is the risk of misstatement in the absence of any internal controls, while control risk is the risk that a material misstatement may not be prevented or detected by internal control. Together, these two types of risk determine the overall risk of material misstatement. Deterrent risk, on the other hand, is not directly related to the risk of material misstatement but instead is a measure of the likelihood that potential fraudsters will be deterred by internal controls.

Question 5

In a general timeline of when audit activities occur for the audit of a client that uses a calendar year-end, the period referred to as "interim" is typically during the latter part of the ________.

Accepted Answer

Interim period typically occurs during the latter part of the third quarter and into the fourth quarter for a calendar year-end client audit.

Question 6

What two factors lead to the development of an overall strategy?

Accepted Answer

The auditor's determination of materiality and audit risk are key factors in developing an overall audit strategy, as they help in planning the nature, timing, and extent of audit procedures.

Question 7

Which of the following heavily influences the process of determining an audit strategy for an account or assertion?

Accepted Answer

All three options heavily influence the process of determining an audit strategy. The risk of material misstatement helps the auditor evaluate the likelihood of material misstatements occurring in the financial statements, which in turn affects the degree of testing and level of assurance needed. Materiality affects the auditor's judgment of whether a particular misstatement is significant enough to impact the financial statements as a whole. Finally, professional skepticism is crucial for auditors to maintain an objective and critical mindset during the audit process, keeping in mind the possibility of fraud or error in the financial statements.

Question 8

What audit procedures are designed to detect material misstatements at the assertion level?

Accepted Answer

Substantive procedures are audit procedures designed to detect material misstatements at the assertion level. Tests of control relate to the effectiveness of internal controls and may not directly relate to material misstatements at the assertion level. Fraudulent financial reporting and misappropriation of assets are types of financial statement fraud that may require specific audit procedures to detect, but they are not necessarily designed to detect material misstatements at the assertion level.

Question 9

If inherent risk is determined to be high for an account or assertion, the next step is to _______.

Accepted Answer

When inherent risk is determined to be high for an account or assertion, the auditor should identify existing internal controls, and determine whether any can be relied on to reduce the assessed level of risk. If there are no effective internal controls or the controls cannot be relied upon, the auditor will need to perform more substantive testing to obtain sufficient appropriate evidence.

Question 10

An audit plan details the nature, extent, and timing of audit procedures to be performed.The "timing" of audit procedures is best defined as _______.

Accepted Answer

Timing in an audit plan refers to when the audit procedure will be performed, such as at the beginning, middle, or end of the audit period. It is not related to how much testing will be done, what type of procedure will be used, or the reliability and relevance of evidence obtained in the audit.

Question 11

In an audit strategy, the first step is to identify ________ risks during the ________ phase.

Accepted Answer

The first step in an audit strategy is to identify inherent risks during the risk assessment phase. This allows the auditor to identify potential risks and plan their audit approach accordingly. The other answer choices are not the first step in the audit strategy process.

Question 12

Auditors may decide to perform some tests of controls or not perform any tests of controls, if inherent risk is assessed as ________.

Accepted Answer

When inherent risk is assessed as moderate or low, auditors may decide not to perform tests of controls, relying instead on the assessment that the risk of material misstatement due to error or fraud is already low. This approach allows auditors to allocate their resources more efficiently.

Question 13

The determination of when audit procedures will be performed is primarily dependent upon _______.

Accepted Answer

The timing of audit procedures is primarily dependent upon the effectiveness of the client's controls. This determines how much work the auditor will need to perform and when it should be done. The other options (B, C, D) are not relevant factors in determining the timing of audit procedures.

Question 14

If results from the tests of controls show the internal control is effective at preventing and/or detecting material misstatements, auditors will conclude that control risk is ______ and overall risk of material misstatement (RMM) is ______.

Accepted Answer

If tests of controls show that the internal control is effective at preventing and/or detecting material misstatements, auditors will conclude that control risk is low and overall risk of material misstatement (RMM) is also low.

Question 15

In an audit situation, which of the following risks can be reduced to zero?

Accepted Answer

Inherent risk, control risk, and detection risk are fundamental components of audit risk. Inherent risk and control risk are related to the client and their environment, and cannot be changed by the auditor. Detection risk is the risk that the auditor fails to detect a material misstatement, which can be managed but not reduced to zero due to limitations in audit procedures and the nature of audit evidence.

Question 16

What are tests of controls?

Accepted Answer

Tests of controls are audit procedures designed to evaluate the operating effectiveness of controls in preventing or detecting and correcting material misstatements at the assertion level. These tests help the auditor to gain assurance about the reliability of the client's internal control system and to assess the risks of material misstatement at the financial statement level. Option B refers to substantive testing, while option C refers to audit planning, and option D refers to audit timelines, which are not related to tests of controls.

Question 17

Tests of controls are also known as _______.

Accepted Answer

Tests of controls are an important part of internal controls testing, which assesses the design and effectiveness of an organization's internal controls. These tests evaluate whether the controls are operating effectively to prevent or detect errors or fraud.

Question 18

An audit plan details the nature, extent, and timing of audit procedures to be performed.The "nature" of audit procedures is best defined as _______.

Accepted Answer

The "nature" of audit procedures refers to the type of procedure that will be used, such as inquiry, observation, inspection, or confirmation. This helps the auditor identify what approach they will take for gathering evidence and testing controls.

Question 19

An audit strategy is developed at the ________ level.

Accepted Answer

An audit strategy is developed at the account or assertion level, as it involves focusing on specific areas of the financial statements and assessing the risks associated with those areas.

Question 20

Substantive procedures are also known as _______.

Accepted Answer

Substantive procedures are performed to obtain evidence about material misstatements in the financial statements. They are also known as tests of details, as they focus on specific account balances, transaction classes, and disclosures. Tests of controls, on the other hand, assess the effectiveness of the entity's internal control over financial reporting. Tests of complex transactions are a type of substantive procedure that focuses on highly unusual or non-routine transactions. Risk assessment is a separate phase of the audit process where the auditor identifies and assesses the risks of material misstatement in the financial statements.

Quiz 3: Risk Assessment Part Iaudit Risk and Audit Strategy