Question 1

Engagement risk is

Accepted Answer

A)  The risk of issuing an incorrect audit opinion. 
B)  The auditor's risk of loss from events arising in connection with financial statements audited and reported upon. 
C)  The overall risk of material misstatement. 
D)  The risk of the entity's financial failure. 
A)  The risk of issuing an incorrect audit opinion. 
B)  The auditor's risk of loss from events arising in connection with financial statements audited and reported upon. 
C)  The overall risk of material misstatement. 
D)  The risk of the entity's financial failure. B

Question 2

Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity's financial statements?

Accepted Answer

A)  Accounts receivable confirmation requests yield significantly fewer responses than expected. 
B)  Audit trails of computer-generated transactions exist only for a short time. 
C)  The chief financial officer does not sign the management representation letter until the last day of the auditor's fieldwork. 
D)  Management consults with other accountants about significant accounting matters. 
A)  Accounts receivable confirmation requests yield significantly fewer responses than expected. 
B)  Audit trails of computer-generated transactions exist only for a short time. 
C)  The chief financial officer does not sign the management representation letter until the last day of the auditor's fieldwork. 
D)  Management consults with other accountants about significant accounting matters. A

Question 3

The combination of inherent risk and control risk is referred to as client risk.

Accepted Answer

A) True 
 B)False  True

Question 4

Engagement risk is the auditor's exposure to loss or injury of his or her reputation from events arising in connection with financial statements audited.

Accepted Answer

A) True 
 B)False

Question 5

The risk of material misstatement differs from detection risk in that it

Accepted Answer

A)  Arises from the misapplication of auditing procedures. 
B)  May be assessed in either quantitative or qualitative terms. 
C)  Exists independently of the actions of the auditor. 
D)  Can be changed at the auditor's discretion. 
A)  Arises from the misapplication of auditing procedures. 
B)  May be assessed in either quantitative or qualitative terms. 
C)  Exists independently of the actions of the auditor. 
D)  Can be changed at the auditor's discretion.

Question 6

The acceptable level of detection risk is inversely related to the

Accepted Answer

A)  Extent of the substantive procedures. 
B)  Risk of misapplying auditing procedures. 
C)  Overall materiality. 
D)  Risk of failing to discover material misstatements. 
A)  Extent of the substantive procedures. 
B)  Risk of misapplying auditing procedures. 
C)  Overall materiality. 
D)  Risk of failing to discover material misstatements.

Question 7

Your classmate asserts, "Accountants shouldn't need to take business courses besides accounting, because they are only interested in the financial statements of a company." Defend or refute this statement.

Accepted Answer

The classmate is misguided. Auditors nee

Question 8

Stacey, the partner in charge of the audit of RIF Enterprises, sets the planned level of audit risk for the audit of accounts payable at .06. The risk of material misstatement is assessed at .65. What is the detection risk for this audit?

Accepted Answer

Substituting the values into t

Question 9

The risk of a material misstatement includes inherent risk and sampling risk.

Accepted Answer

A) True 
 B)False

Question 10

When assessing the risk of material misstatement, auditors evaluate the reasonableness of an entity's accounting estimates. An auditor normally would be concerned about assumptions that are

Accepted Answer

A)  Susceptible to bias. 
B)  Consistent with prior periods. 
C)  Insensitive to variations. 
D)  Similar to industry guidelines. 
A)  Susceptible to bias. 
B)  Consistent with prior periods. 
C)  Insensitive to variations. 
D)  Similar to industry guidelines.

Question 11

Inherent risk includes sampling risk and detection risk.

Accepted Answer

A) True 
 B)False

Question 12

Assume that you are the new audit senior on the LV Drug Corporation (LVD) engagement. LVD is a pharmaceutical company that has three successful drugs and a number of drugs in progress in its research and development pipeline. You are considering your audit plan and it is important to identify the inherent risks that LVD has and how they relate to the planning process.
Required:
For each of the following factors, indicate whether it will tend to increase, decrease, or have no effect on inherent risk, and the reasoning for your answer.
a. Dr. Jones is the major shareholder of LVD and its CEO.
b. Your firm has audited LVD for the last four years.
c. There has been high turnover of key accounting personnel during the last two years.
d. The internal audit function reports to the audit committee.
e. LVD has been the subject of lawsuits by users of Framadon who claim that the drug affects their liver functions. LVD is confident that there are no such side effects from the use of Framadon.

Accepted Answer

a. Increase: The CEO, as the major share

Question 13

The auditor is most likely to presume that a high risk of a fraud exists if

Accepted Answer

A)  The entity is a multinational company that does business in numerous foreign countries. 
B)  The entity does business with several related parties. 
C)  Inadequate segregation of duties places an employee in a position to perpetrate and conceal theft. 
D)  Inadequate employee training results in lengthy EDP exception reports each month. 
A)  The entity is a multinational company that does business in numerous foreign countries. 
B)  The entity does business with several related parties. 
C)  Inadequate segregation of duties places an employee in a position to perpetrate and conceal theft. 
D)  Inadequate employee training results in lengthy EDP exception reports each month.

Question 14

Which of the following is correct concerning required auditor communications about fraud?

Accepted Answer

A)  Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved. 
B)  Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission. 
C)  Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor. 
D)  The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities. 
A)  Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved. 
B)  Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission. 
C)  Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor. 
D)  The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities.

Question 15

An auditor discovers a likely fraud during an audit but concludes that the overall effect of the fraud is not sufficiently material to affect the audit opinion. The auditor should probably

Accepted Answer

A)  Disclose the fraud to the appropriate level of the client's management. 
B)  Disclose the fraud to appropriate authorities external to the client. 
C)  Discuss with the client the additional audit procedures that will be needed to identify the exact amount of the fraud. 
D)  Modify the audit program to include tests specifically designed to identify the fraud and its impact on the financial statements. 
A)  Disclose the fraud to the appropriate level of the client's management. 
B)  Disclose the fraud to appropriate authorities external to the client. 
C)  Discuss with the client the additional audit procedures that will be needed to identify the exact amount of the fraud. 
D)  Modify the audit program to include tests specifically designed to identify the fraud and its impact on the financial statements.

Question 16

During the course of the audit of FF Financial, you find that some accounting entries have been altered. You believe this may be the result of management fraud and you have determined that the effect of this could be material to the financial statements. What steps should you take in response to the accounting entries and your concern about management fraud?

Accepted Answer

In this situation, the auditor should at

Question 17

The primary responsibility for preventing fraud in an organization lies with

Accepted Answer

A)  The audit committee of the board of directors. 
B)  The internal audit function. 
C)  The external auditor. 
D)  The organization's management. 
A)  The audit committee of the board of directors. 
B)  The internal audit function. 
C)  The external auditor. 
D)  The organization's management.

Question 18

Engagement risk can be eliminated by

Accepted Answer

A)  Establishing policies for client acceptance and continuance. 
B)  Lowering audit risk. 
C)  Lowering materiality. 
D)  Engagement risk cannot be eliminated. 
A)  Establishing policies for client acceptance and continuance. 
B)  Lowering audit risk. 
C)  Lowering materiality. 
D)  Engagement risk cannot be eliminated.

Question 19

Professional judgment must be used when evaluating business risk.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

Accepted Answer

A)  Inability to generate cash flows from operations while reporting substantial earnings growth. 
B)  Management's lack of interest in increasing the entity's earnings trend. 
C)  Large amounts of liquid assets that are easily converted into cash. 
D)  Inability to borrow necessary capital without granting debt covenants. 
A)  Inability to generate cash flows from operations while reporting substantial earnings growth. 
B)  Management's lack of interest in increasing the entity's earnings trend. 
C)  Large amounts of liquid assets that are easily converted into cash. 
D)  Inability to borrow necessary capital without granting debt covenants.

Engagement risk is

Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity's financial statements?

The combination of inherent risk and control risk is referred to as client risk.

Engagement risk is the auditor's exposure to loss or injury of his or her reputation from events arising in connection with financial statements audited.

The risk of material misstatement differs from detection risk in that it

The acceptable level of detection risk is inversely related to the

Your classmate asserts, "Accountants shouldn't need to take business courses besides accounting, because they are only interested in the financial statements of a company." Defend or refute this statement.

Stacey, the partner in charge of the audit of RIF Enterprises, sets the planned level of audit risk for the audit of accounts payable at .06. The risk of material misstatement is assessed at .65. What is the detection risk for this audit?

The risk of a material misstatement includes inherent risk and sampling risk.

When assessing the risk of material misstatement, auditors evaluate the reasonableness of an entity's accounting estimates. An auditor normally would be concerned about assumptions that are

Inherent risk includes sampling risk and detection risk.

The auditor is most likely to presume that a high risk of a fraud exists if

Which of the following is correct concerning required auditor communications about fraud?

An auditor discovers a likely fraud during an audit but concludes that the overall effect of the fraud is not sufficiently material to affect the audit opinion. The auditor should probably

The primary responsibility for preventing fraud in an organization lies with

Engagement risk can be eliminated by

Professional judgment must be used when evaluating business risk.

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

An Introduction to Assurance and Financial Statement Auditing

The Financial Statement Auditing Environment

Audit Planning, Types of Audit Tests, and Materiality

Evidence and Documentation

Internal Control in a Financial Statement Audit

Auditing Internal Control Over Financial Reporting

Audit Sampling: An Overview and Application to Tests of Controls

Audit Sampling: An Application to Substantive Tests of Account Balances

Auditing the Revenue Process

Auditing the Purchasing Process

Auditing the Human Resource Management Process

Auditing the Inventory Management Process

Auditing the Financing Investing Process: Prepaid Expenses Intangible Assets and Property Plant and Equipment

Auditing the Financing Investing Process: Long-Term Liabilities Stockholders Equity and Income Statement Accounts

Auditing the Financinginvesting Process: Cash and Investments

Completing the Audit Engagement

Reports on Audited Financial Statements

Professional Conduct, Independence, and Quality Control

Legal Liability

Assurance, Attestation, and Internal Auditing Services

Filters

Exam 4: Risk Assessment

Engagement risk is

Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity's financial statements?

The combination of inherent risk and control risk is referred to as client risk.

Engagement risk is the auditor's exposure to loss or injury of his or her reputation from events arising in connection with financial statements audited.

The risk of material misstatement differs from detection risk in that it

The acceptable level of detection risk is inversely related to the

Your classmate asserts, "Accountants shouldn't need to take business courses besides accounting, because they are only interested in the financial statements of a company." Defend or refute this statement.

Stacey, the partner in charge of the audit of RIF Enterprises, sets the planned level of audit risk for the audit of accounts payable at .06. The risk of material misstatement is assessed at .65. What is the detection risk for this audit?

The risk of a material misstatement includes inherent risk and sampling risk.

When assessing the risk of material misstatement, auditors evaluate the reasonableness of an entity's accounting estimates. An auditor normally would be concerned about assumptions that are

Inherent risk includes sampling risk and detection risk.

The auditor is most likely to presume that a high risk of a fraud exists if

Which of the following is correct concerning required auditor communications about fraud?

An auditor discovers a likely fraud during an audit but concludes that the overall effect of the fraud is not sufficiently material to affect the audit opinion. The auditor should probably

The primary responsibility for preventing fraud in an organization lies with

Engagement risk can be eliminated by

Professional judgment must be used when evaluating business risk.

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

An Introduction to Assurance and Financial Statement Auditing

The Financial Statement Auditing Environment

Audit Planning, Types of Audit Tests, and Materiality

Evidence and Documentation

Internal Control in a Financial Statement Audit

Auditing Internal Control Over Financial Reporting

Audit Sampling: An Overview and Application to Tests of Controls

Audit Sampling: An Application to Substantive Tests of Account Balances

Auditing the Revenue Process

Auditing the Purchasing Process

Auditing the Human Resource Management Process

Auditing the Inventory Management Process

Auditing the Financing Investing Process: Prepaid Expenses Intangible Assets and Property Plant and Equipment

Auditing the Financing Investing Process: Long-Term Liabilities Stockholders Equity and Income Statement Accounts

Auditing the Financinginvesting Process: Cash and Investments

Completing the Audit Engagement

Reports on Audited Financial Statements

Professional Conduct, Independence, and Quality Control

Legal Liability

Assurance, Attestation, and Internal Auditing Services

Filters