Question 1

The situation and circumstances can dictate the level of certain risks no matter what the auditor does.However, the auditor is always able to decide to reduce one of the following risks:
A)Control risk.
B)Risk of management fraud.
C)Detection risk.
D)Inherent risk.

Accepted Answer

Detection risk is the only risk that the auditor has direct control over. By increasing the amount of substantive testing and audit procedures, the auditor can reduce detection risk. Control risk, inherent risk, and risk of management fraud are all related to the entity and its environment, which are outside of the auditor's control. Therefore, the best choice is C) Detection risk.

Question 2

Your preliminary audit plan for Astro Ltd states that planning materiality is set at one per cent of total assets.This planning materiality amount:
A)will need to be used for evaluation at the end of the engagement to judge the overall presentation of the financial report, because that was the level used to set the scope of testing.
B)should not be revised in mid-audit.
C)may be revised based on the results of audit tests and new information as the audit progresses.
D)is appropriate for planning, but the evaluation materiality amount must be based on a percentage of revenue.

Accepted Answer

Planning materiality may be revised based on the results of audit tests and new information as the audit progresses. The planning materiality amount is used to set the scope of testing, but it may be adjusted as necessary during the course of the audit. Therefore, it is not necessary to revise it mid-audit or use it for the evaluation at the end of the engagement. Additionally, there is no requirement to use a percentage of revenue for evaluation materiality.

Question 3

Which of the following best describes the concept of audit risk?
A)The risk of the auditor being sued because of association with an audit client.
B)The risk that the auditor will provide an unmodified opinion on a materially misstated financial report.
C)The overall risk that a material misstatement exists in the financial report.
D)The risk that auditors use audit procedures that are inappropriate.

Accepted Answer

Audit risk is the risk that the auditor expresses an unmodified (clean) opinion on the financial statements when, in fact, there is a material misstatement present. This risk encompasses the possibility of not detecting errors or frauds that could impact the financial statements significantly.

Question 4

All of the following auditing procedures are substantive tests except:
A)analytical procedures.
B)tests of approvals on invoices.
C)vouching of sales transactions to delivery dockets.
D)confirmation of bank balances at year-end.

Accepted Answer

Tests of approvals on invoices are tests of controls, as they aim to ensure that proper approval processes are in place and being followed. The other options are all substantive tests, as they gather evidence directly related to the financial statements and are used to form an opinion on their accuracy.

Question 5

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 report audit.
D)can be changed at the auditor's discretion.

Accepted Answer

Inherent risk and control risk are risks that exist independently of the financial report audit, meaning they are inherent in the nature of the business and its controls. On the other hand, detection risk arises from the misapplication of auditing procedures, which can be controlled by the auditor. Therefore, choice C is the correct answer. Choices A, B, and D are incorrect because they do not accurately describe the difference between inherent risk and control risk and detection risk.

Question 6

Which of the following procedures would be least likely to be included in an auditor's test of controls?
A)Observation.
B)Enquiry.
C)Confirmation.
D)Inspection.

Accepted Answer

Confirmation typically involves communicating with a third party and is more commonly associated with substantive testing rather than testing of controls. Observation, enquiry, and inspection are all commonly used procedures in testing of controls.

Question 7

Which of the following would an auditor be most likely to use in determining the preliminary judgment about materiality?
A)The entity's annualised interim financial statements.
B)The contents of the management representation letter.
C)The results of the internal control questionnaire.
D)The anticipated sample size of the planned substantive tests.

Accepted Answer

The auditor would most likely use the entity's annualised interim financial statements to determine the preliminary judgment about materiality. This is because materiality relates to the significance of financial information, and the auditor needs to understand the entity's financial position and performance as reflected in its financial statements to make this judgment.

Question 8

Engagement risk is:
A)the risk of issuing an incorrect auditor's opinion.
B)the auditor's risk of loss from events arising in connection with the financial report audited and reported upon.
C)the overall risk of material misstatements.
D)the risk of entity financial failure.

Accepted Answer

Engagement risk refers to the risk the auditor faces of suffering a loss or damage from events associated with the financial statements they have audited and reported on. This could include damage to their professional reputation, legal liability, or financial loss, but it is not directly related to the risk of issuing an incorrect opinion, the risk of material misstatement, or the risk of the entity's financial failure.

Question 9

As the acceptable level of detection risk decreases, an auditor may change the:
A)substantive tests of details to substantive analytical procedures.
B)nature of substantive tests from less effective to more effective procedures.
C)number of tests of controls.
D)assessed level of inherent risk to a higher amount.

Accepted Answer

As the acceptable level of detection risk decreases, the auditor may decide to change the nature of substantive tests from less effective to more effective procedures. This is because a lower acceptable level of detection risk means that the auditor needs to be more certain that they are identifying any material misstatements in the financial statements, which can be accomplished through more rigorous and effective substantive testing procedures.

Question 10

Which of the following relatively small misstatements would most likely have a material effect on an entity's financial report?
A)An illegal payment to a foreign official that was not recorded.
B)A piece of obsolete office equipment that was not retired.
C)A petty cash fund disbursement that was not properly authorised.
D)An uncollectible account receivable that was not written off.

Accepted Answer

Illegal payments, such as bribes to foreign officials, even if small, are considered material due to their nature. They could indicate significant legal and ethical issues within the entity, potentially affecting the entity's operations and reputation significantly.

Question 11

Which one of the following statements is correct concerning the concept of materiality?
A)Materiality is determined by reference to guidelines established by the Australian Securities and Investments Commission (ASIC).
B)Materiality depends only on the dollar amount of an item relative to other items in the financial report.
C)Materiality depends on the nature of an item rather than on the dollar amount.
D)Materiality is a matter of professional judgment.

Accepted Answer

Materiality is a matter of professional judgment, which is based on both quantitative (dollar amount) and qualitative (nature or context of the item) factors. While ASIC may provide guidance on materiality, it is ultimately up to the professional judgment of the auditor to determine what is material.

Question 12

As the acceptable level of detection risk decreases, the assurance directly provided from:
A)substantive tests should increase.
B)substantive tests should decrease.
C)tests of controls should increase.
D)tests of controls should decrease.

Accepted Answer

As the acceptable level of detection risk decreases, the auditor needs to increase the level of assurance provided. This can be achieved through increasing the extent or scope of substantive tests, which provide evidence about the accuracy and completeness of the financial statements. Therefore, the correct choice is A.

Question 13

When considering materiality for planning purposes, an auditor believes that misstatements aggregating $10 000 would have a material effect on an entity's income statement, but that misstatements would have to aggregate $20 000 to materially affect the statement of financial position.Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate:
A)$10 000.
B)$15 000.
C)$20 000.
D)$30 000.

Accepted Answer

The auditor should design procedures to detect the lower amount of misstatement ($10,000) that they believe would have a material effect on the financial statements, in this case, the income statement. This ensures that all potentially material misstatements are identified.

Question 14

The extent of substantive tests for an assertion in relation to the assessed level of inherent risk varies in a relationship that is ordinarily:
A)opposite.
B)inverse.
C)direct.
D)unequal.

Accepted Answer

The extent of substantive tests for an assertion in relation to the assessed level of inherent risk varies in a direct relationship. This means that as the assessed level of inherent risk increases, the extent of substantive tests typically increases as well, to provide sufficient appropriate audit evidence.

Question 15

Which of the following tests is intended to detect deviations from prescribed Accounting Department procedures?
A)Substantive tests specified by a standardised audit program.
B)Tests of controls designed specifically for the client.
C)Analytical tests as designed in the industry audit guide.
D)Computerised analytical tests tailored for the configuration of IT equipment in use.

Accepted Answer

Tests of controls are specifically designed to evaluate the effectiveness of internal control procedures, including those in the Accounting Department. Substantive tests specified by a standardised audit program are intended to provide evidence about the accuracy and completeness of the financial statements. Analytical tests as designed in the industry audit guide may be used to identify unusual transactions or patterns in financial data, but are not specific to Accounting Department procedures. Computerised analytical tests tailored for the configuration of IT equipment in use may be used to evaluate the performance or security of IT systems, but are not relevant to detecting deviations from Accounting Department procedures.

Question 16

As the acceptable level of detection risk decreases, an auditor may change the:
A)timing of substantive tests by performing them at an interim date rather than at balance date.
B)assessed level of inherent risk to a higher amount.
C)timing of tests of controls by performing them at several dates rather than at one time.
D)nature of substantive tests from a less effective to a more effective procedure.

Accepted Answer

As acceptable level of detection risk decreases, the auditor wants a higher level of assurance, which can be achieved by changing the nature of substantive tests from a less effective to a more effective procedure. Performing substantive tests at an interim date (choice A) and testing controls at several dates (choice C) might be helpful, but they do not directly increase the effectiveness of substantive tests. Assessing inherent risk to a higher amount (choice B) is not logical because it will increase the amount of audit work needed, which is the opposite of what is desired.

Question 17

Which of the following is not a qualitative factor that may affect an auditor's establishment of materiality?
A)Potential for fraud.
B)The entity is close to violating loan covenants.
C)Firm policy sets materiality at 5 per cent of pre-tax income.
D)A small misstatement that would interrupt an earnings trend.

Accepted Answer

The firm policy of setting materiality at a specific percentage of pre-tax income is a quantitative factor and not a qualitative factor. The other options (potential for fraud, violation of loan covenants, interruption of earnings trend) are all qualitative factors that could affect an auditor's determination of materiality.

Question 18

As the acceptable level of detection risk increases, an auditor may change the:
A)assessed level of control risk from less than high to high.
B)assurance provided by tests of controls by using a larger sample size than planned.
C)timing of substantive tests from year-end to an interim date.
D)nature of substantive tests from less effective to more effective procedures.

Accepted Answer

Increasing the acceptable level of detection risk allows an auditor to perform substantive tests at an interim date rather than at year-end, as the auditor is willing to accept a higher risk that the procedures will not detect a material misstatement.

Question 19

The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process.In regard to minimising this risk, the auditor primarily relies on:
A)substantive tests.
B)tests of controls.
C)internal control.
D)statistical analysis.

Accepted Answer

Substantive tests are designed to detect material misstatements in the financial statements, thus helping the auditor to minimize the risk of not detecting such misstatements.

Question 20

'Dual-purpose tests' is a term used for:
A)tests of controls that address both the design of the control procedures and their operating effectiveness.
B)tests of transactions that include substantive procedures as well as tests of controls.
C)tests that address both balances and transaction classes.
D)tests performed because of client expectations as well as for gathering audit evidence.

Accepted Answer

Dual-purpose tests refer to tests of transactions that include both substantive procedures (to determine monetary accuracy) and tests of controls (to determine whether the control procedures are effective in preventing and detecting errors). These tests serve two purposes: to gather audit evidence and to evaluate the effectiveness of control procedures.

Quiz 4: Overview of Elements of the Financial Report Audit Process

The situation and circumstances can dictate the level of certain risks no matter what the auditor does.However, the auditor is always able to decide to reduce one of the following risks:

Your preliminary audit plan for Astro Ltd states that planning materiality is set at one per cent of total assets.This planning materiality amount:

Which of the following best describes the concept of audit risk?

All of the following auditing procedures are substantive tests except:

Inherent risk and control risk differ from detection risk in that they:

Which of the following procedures would be least likely to be included in an auditor's test of controls?

Which of the following would an auditor be most likely to use in determining the preliminary judgment about materiality?

Engagement risk is:

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

Which of the following relatively small misstatements would most likely have a material effect on an entity's financial report?

Which one of the following statements is correct concerning the concept of materiality?

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

The extent of substantive tests for an assertion in relation to the assessed level of inherent risk varies in a relationship that is ordinarily:

Which of the following tests is intended to detect deviations from prescribed Accounting Department procedures?

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

Which of the following is not a qualitative factor that may affect an auditor's establishment of materiality?

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

The auditor faces a risk that the audit will not detect material misstatements that occur in the accounting process.In regard to minimising this risk, the auditor primarily relies on:

'Dual-purpose tests' is a term used for: