Question 1

Under Statements on Auditing Standards, which of the following would be classified as an error?

Accepted Answer

A)  Misappropriation of assets for the benefit of management. 
B)  Misinterpretation by management of facts that existed when the financial statements were prepared. 
C)  Preparation of records by employees to cover a fraudulent scheme. 
D)  Intentional omission of the recording of a transaction to benefit a third party. 
A)  Misappropriation of assets for the benefit of management. 
B)  Misinterpretation by management of facts that existed when the financial statements were prepared. 
C)  Preparation of records by employees to cover a fraudulent scheme. 
D)  Intentional omission of the recording of a transaction to benefit a third party.

Question 2

Inherent risk is the susceptibility of an assertion to material misstatement, assuming no related controls.

Accepted Answer

A) True 
 B)False

Question 3

The risk of material misstatement includes which of the following?

Accepted Answer

A)  Detection risk. 
B)  Audit risk. 
C)  Inherent risk. 
D)  Nonsampling risk. 
A)  Detection risk. 
B)  Audit risk. 
C)  Inherent risk. 
D)  Nonsampling risk.

Question 4

When an entity moves into a significant new line of business, all of the following increase except:

Accepted Answer

A)  Client risk. 
B)  Acceptable audit risk. 
C)  Risk of material misstatement. 
D)  Entity business risk. 
A)  Client risk. 
B)  Acceptable audit risk. 
C)  Risk of material misstatement. 
D)  Entity business risk.

Question 5

When an auditor increases the assessed level of risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase the

Accepted Answer

A)  Extent of tests of controls. 
B) Level of detection risk. 
C) Extent of substantive tests. 
D) Level of inherent risk. 
A)  Extent of tests of controls. 
B) Level of detection risk. 
C) Extent of substantive tests. 
D) Level of inherent risk.

Question 6

In general, material frauds perpetrated by which of the following are most difficult to detect?

Accepted Answer

A)  Internal audit function. 
B)  Keypunch operator. 
C)  Cashier. 
D)  Controller. 
A)  Internal audit function. 
B)  Keypunch operator. 
C)  Cashier. 
D)  Controller.

Question 7

As the acceptable level of detection risk decreases, an auditor may change the

Accepted Answer

A)  Timing of tests of controls by performing them at an interim date rather than at year-end. 
B)  Nature of substantive procedures from less effective to more effective procedures. 
C)  Timing of tests of controls by performing them at several dates rather than at one time. 
D)  Assessed level of risk of material misstatement to a higher amount. 
A)  Timing of tests of controls by performing them at an interim date rather than at year-end. 
B)  Nature of substantive procedures from less effective to more effective procedures. 
C)  Timing of tests of controls by performing them at several dates rather than at one time. 
D)  Assessed level of risk of material misstatement to a higher amount.

Question 8

As the acceptable level of detection risk decreases, the assurance directly provided from

Accepted Answer

A)  Substantive procedures should increase. 
B)  Substantive procedures should decrease. 
C)  Tests of controls should increase. 
D)  Tests of controls should decrease. 
A)  Substantive procedures should increase. 
B)  Substantive procedures should decrease. 
C)  Tests of controls should increase. 
D)  Tests of controls should decrease.

Question 9

In one sentence each, define misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets.

Accepted Answer

Misstatements arising from fraudulent fi

Question 10

Increased fraud risk could result in all of the following except:

Accepted Answer

A)  Lower detection risk. 
B)  Higher inherent risk. 
C)  Lower control risk. 
D)  Higher client risk. 
A)  Lower detection risk. 
B)  Higher inherent risk. 
C)  Lower control risk. 
D)  Higher client risk.

Question 11

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of risk of material misstatement 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

Accepted Answer

A)  Decrease amount of substantive testing. 
B)  Decrease detection risk. 
C)  Increase detection risk. 
D)  Increase materiality levels. 
A)  Decrease amount of substantive testing. 
B)  Decrease detection risk. 
C)  Increase detection risk. 
D)  Increase materiality levels.

Question 12

Which of the following procedures would not be used to obtain an understanding of the entity and its environment?

Accepted Answer

A)  Observe entity operations. 
B)  Reperform entity processes. 
C)  Verify proper valuation of inventory subject to technological obsolescence. 
D)  Review prior year's audit documentation. 
A)  Observe entity operations. 
B)  Reperform entity processes. 
C)  Verify proper valuation of inventory subject to technological obsolescence. 
D)  Review prior year's audit documentation.

Question 13

Which of the following is a source of detection risk?

Accepted Answer

A)  Unstable business environment. 
B)  Poor client controls. 
C)  A nonrepresentative sample. 
D)  Inherent risk assessed too high. 
A)  Unstable business environment. 
B)  Poor client controls. 
C)  A nonrepresentative sample. 
D)  Inherent risk assessed too high.

Question 14

The achieved (actual) level of audit risk

Accepted Answer

A)  Can always be accurately assessed by the auditor. 
B)  Should be greater than or equal to acceptable audit risk. 
C)  Can never be known with certainty. 
D)  Is the same for all audit engagements. 
A)  Can always be accurately assessed by the auditor. 
B)  Should be greater than or equal to acceptable audit risk. 
C)  Can never be known with certainty. 
D)  Is the same for all audit engagements.

Question 15

Which of the following is a factual misstatement?

Accepted Answer

A)  A management estimate that is outside the range of reasonable outcomes determined by the auditor. 
B)  A fixed asset being recorded at the incorrect cost. 
C)  A projected misstatement resulting from errors found during sampling. 
D)  Difference in judgment between the auditor and management. 
A)  A management estimate that is outside the range of reasonable outcomes determined by the auditor. 
B)  A fixed asset being recorded at the incorrect cost. 
C)  A projected misstatement resulting from errors found during sampling. 
D)  Difference in judgment between the auditor and management.

Question 16

Audit 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 17

What is the difference between audit risk and engagement risk?

Accepted Answer

Audit risk is the risk that the auditor

Question 18

Which of the following audit risk components may be assessed in qualitative terms?

Accepted Answer

A)  Risk of material misstatement. 
B)  Detection risk. 
C)  Neither risk of material misstatement nor detection risk. 
D)  Both risk of material misstatement and detection risk. 
A)  Risk of material misstatement. 
B)  Detection risk. 
C)  Neither risk of material misstatement nor detection risk. 
D)  Both risk of material misstatement and detection risk.

Question 19

Which of the following is not a misstatement of the financial statements?

Accepted Answer

A)  The entity uses different inventory accounting methods for internal and external reporting. 
B)  A departure from GAAP. 
C)  The footnote for pensions is omitted. 
D)  A clerk incorrectly based the allowance for doubtful accounts on 31% of sales as opposed to 13% of sales as determined by the controller. 
A)  The entity uses different inventory accounting methods for internal and external reporting. 
B)  A departure from GAAP. 
C)  The footnote for pensions is omitted. 
D)  A clerk incorrectly based the allowance for doubtful accounts on 31% of sales as opposed to 13% of sales as determined by the controller.

Question 20

DATRIX, Inc., a Fortune 500 company, has been experiencing poor performance. Industry analysts have been issuing negative reports and the company's stock price has been steadily declining. As an auditor, what would concern you about the audit engagement of DATRIX, Inc.

Accepted Answer

An auditor should be concerned because o

Exam 4: Risk Assessment

Under Statements on Auditing Standards, which of the following would be classified as an error?

Inherent risk is the susceptibility of an assertion to material misstatement, assuming no related controls.

The risk of material misstatement includes which of the following?

When an entity moves into a significant new line of business, all of the following increase except:

When an auditor increases the assessed level of risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase the

In general, material frauds perpetrated by which of the following are most difficult to detect?

As the acceptable level of detection risk decreases, an auditor may change the

As the acceptable level of detection risk decreases, the assurance directly provided from

In one sentence each, define misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets.

Increased fraud risk could result in all of the following except:

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of risk of material misstatement 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

Which of the following procedures would not be used to obtain an understanding of the entity and its environment?

Which of the following is a source of detection risk?

The achieved (actual) level of audit risk

Which of the following is a factual misstatement?

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

What is the difference between audit risk and engagement risk?

Which of the following audit risk components may be assessed in qualitative terms?

Which of the following is not a misstatement of the financial statements?

DATRIX, Inc., a Fortune 500 company, has been experiencing poor performance. Industry analysts have been issuing negative reports and the company's stock price has been steadily declining. As an auditor, what would concern you about the audit engagement of DATRIX, Inc.

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

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