Question 1

What is the primary difference between financial reporting risk and audit risk?

Accepted Answer

Financial reporting risk relates to the risk of misstatements in financial statements due to errors or intentional manipulation, while audit risk refers to the risk that the auditor fails to detect such misstatements. The primary difference between them is that financial reporting risk arises from the responsibility of the company management to prepare accurate financial statements, while audit risk arises from the responsibility of the auditor to provide an opinion on the accuracy of the financial statements. Therefore, the responsibilities of the respective parties involved are the primary difference between financial reporting risk and audit risk.

Question 2

Janie Jones,CPA is proposing on a prospective audit engagement for White Mountain Enterprises.After obtaining written permission of White Mountain,Janie is required to perform what procedure prior to accepting it as a new client?

Accepted Answer

According to the AICPA Code of Professional Conduct, before accepting an engagement with a new client, the auditor should contact the former auditor about certain matters of interest in the auditor's decision to accept the engagement. This is to obtain an understanding of any potential risks associated with the engagement and to evaluate whether the auditor has the necessary skills and resources to perform the engagement. Options A and D are also important procedures to perform, but they do not address the specific requirement of contacting the former auditor. Option B is not always required, especially if there are no significant disagreements between the former auditor and the client.

Question 3

The auditor will utilize many resources to assess management integrity in the client acceptance process.Which of the following will an auditor most likely refrain from using in this search?

Accepted Answer

Auditors typically use all available resources, including predecessor auditors, other professionals, and public databases, to assess management integrity during the client acceptance process.

Question 4

Which one of the following is a valid source of information about the client's processes?

Accepted Answer

All the options listed are valid sources of information about the client's processes, as they provide insights through different methods such as direct inquiry, financial review, and physical observation.

Question 5

Which of the following is typically not a significant risk factor that an auditor will consider in the client acceptance of Stitch Magee Co.?

Accepted Answer

The fact that Stitch Magee Co. procures much of its raw materials from Detroit, Michigan is not typically seen as a significant risk factor in client acceptance by auditors. The other options all present potential risks that an auditor would consider. Brad Stitch's prior investigation for securities violations, the fact that the company is a public company in a high technology industry, and the significant amount of inventory sold to a company owned by the treasurer's father all pose potential risk factors that would need to be evaluated by the auditor.

Question 6

The preliminary use of analytical review procedures by the auditor is

Accepted Answer

The preliminary use of analytical review procedures by the auditor is required to identify areas of heightened risk. Analytical review procedures are used to obtain an understanding of the entity's business and industry, help identify areas of potential misstatement, and assess the risk of material misstatement.

Question 7

Kool Connections,Inc.requests that Wreath and Greenworth Auditors make a proposal to provide audit services for the company.Which of the following is a correct assumption surrounding the result of the proposal?

Accepted Answer

It is up to Greenworth to decide whether or not to accept Kool Connections based on perceived risks, such as reputation or litigation concerns. Greenworth is not required to accept Kool Connections, nor is it necessary for them to interview the prior audit firm or contact the PCAOB or AICPA for a review of the proposal.

Question 8

The risk that financial statements are likely to be misstated materially without regard to the effectiveness of internal control is which type of risk?

Accepted Answer

Inherent risk is the susceptibility of financial statements to material misstatement without considering internal controls.

Question 9

What analysis best considers the economic relationships among account balances?

Accepted Answer

Ratio analysis examines the relationships between different financial statement accounts, providing insights into a company's financial health and performance.

Question 10

Which is a primary limitation of the audit risk model?

Accepted Answer

The audit risk model assumes that components of audit risk are independent variables, which is not always accurate in real-world situations. There are many interdependencies between the components that are not taken into account.

Answer: A, D
 The audit risk model does not consider external forces on the client organization that may impact the risk of material misstatement, which is a primary limitation. Additionally, the control risk estimate is subjective and must be adjusted by the auditor rather than being determined by an objective measure, which is another limitation.

Question 11

The auditor commences to understand the client and related risks of the organization for what purpose?

Accepted Answer

The purpose of the auditor's initial understanding of the client and related risks is to determine whether the auditor has sufficient knowledge to perform the engagement/audit. This includes gaining an understanding of the client's industry, operations, and internal controls, as well as identifying any risks that may impact the financial statements. This information is necessary for the auditor to plan and perform the audit effectively. The other options presented are not the primary purpose of the auditor's initial understanding of the client and related risks.

Question 12

An auditor compares year-to-year account balances in order to perform analytical procedures.This is an example of:

Accepted Answer

Comparing year-to-year account balances is an example of trend analysis, which involves evaluating changes in financial information over time. Ratio analysis involves comparing different financial information to calculate ratios, internal control analysis examines the effectiveness of a company's internal controls, and vertical analysis involves comparing line items on a financial statement to each other within the same time period.

Question 13

What is the most important purpose that is achieved by having an auditor write a formal engagement letter that is signed by the client?

Accepted Answer

A formal engagement letter signed by the client is a communication and clarification of the responsibilities and expectations of the auditor and the client. It outlines the scope of the audit, the responsibilities of each party, and the timeframe for completion. This helps ensure that both parties are on the same page and helps avoid misunderstandings or disputes later on.

Question 14

Why will the external auditor typically interview the internal audit department as it relates to its risk-based approach?

Accepted Answer

The external auditor interviews the internal audit department to understand and assess management risk processes, as this information helps the auditor identify areas of potential risk and plan their audit approach accordingly. The auditor may also use this information to evaluate the effectiveness of the internal audit function and comment on any deficiencies in their controls. However, changing internal controls or performing analytical procedures are not the primary reasons for interviewing the internal audit department.

Question 15

Analytical procedures are used in an audit because it is assumed of financial statements that

Accepted Answer

Analytical procedures are used in an audit because it is assumed that plausible relationships among data may reasonably be expected to exist and continue. By analyzing these relationships, auditors can identify any potential misstatements or anomalies in the financial statements. However, this does not necessarily mean that management fraud can be discovered using only analytical procedures, as fraud may require further investigation and substantive testing. Analytical procedures are also not used as tests of controls, which are separate from substantive procedures such as analytical procedures.

Question 16

What is the most relevant use of a knowledge management system for an auditor?

Accepted Answer

A knowledge management system can be used by auditors to share information related to auditing, accounting standards, and risks, allowing them to improve their knowledge and decision-making capabilities. Collaboration and communication among auditors can help to ensure that audits are conducted effectively and efficiently, which is important in maintaining the integrity of financial reporting.

Answer: A is not correct because while a knowledge management system may automate certain procedures, it cannot perform an entire audit automatically without human oversight. Answer B is also incorrect as auditors are required to make independent judgments based on their own professional judgment and integrity. Answer D is not relevant to the use of a knowledge management system, as the system is aimed at managing information and communication related to auditing, rather than the location from which auditors work.

Question 17

A stipulation in an agreement between an entity and its creditor that places documented restrictions on the organization is referred to as

Accepted Answer

Debt covenants are terms and conditions that are included in loan agreements to protect the interests of creditors. These covenants place restrictions on the borrower to ensure that the loan is repaid on time and in full.

Question 18

Which of the following will an auditor most likely discuss with the former auditors of a potential client prior to acceptance?

Accepted Answer

An auditor will most likely discuss all of the options mentioned above with the former auditors of a potential client prior to acceptance. These discussions are necessary to gain an understanding of the potential client's financial reporting history, the nature of the relationship with the former auditors, and any issues or concerns regarding the integrity of management, disagreements with management regarding accounting principles and the reasons for changing audit firms.

Question 19

The auditor is required to discuss with the audit committee whether or not the financial statements are fairly presented and appropriately applied in accordance with

Accepted Answer

The financial statements being fairly presented and appropriately applied is a requirement of Generally Accepted Accounting Principles (GAAP). The other answer choices are not relevant to this requirement.

Question 20

In determining audit risk,the auditor decides how much risk will be taken on by the firm.Which of the following is correct regarding this decision by the auditor?

Accepted Answer

The auditor may decide not to take the audit engagement if the audit risk is deemed too high. It is not ethical for the auditor to intentionally render an inappropriate opinion, and accepting audit risk at 100% is not feasible. Engagement risk is not an appropriate measure of audit risk.

Quiz 4: Audit Risk,business Risk,and Audit Planning