Question 1

Which of the following are two frequently used preliminary analytical procedures?
A)Reasonableness tests and economic analyses.
B)Trend analyses and reasonableness tests.
C)Ratio analyses and economic analyses.
D)Ratio analyses and trend analyses.

Accepted Answer

Ratio analyses and trend analyses are the two common preliminary analytical procedures used to identify areas that may represent a higher risk of material misstatement of financial statements. Ratio analysis involves the calculation and interpretation of financial ratios such as liquidity, profitability, and efficiency ratios. Trend analysis involves analyzing changes in financial statement items over time to identify significant fluctuations. Therefore, option D is the correct answer.

Question 2

Which of the following are common brainstorming session guidelines?
A)Freedom of expression.
B)Respectful communication.
C)Suspension of criticism.
D)All of the above.

Accepted Answer

All three options are common guidelines for a successful brainstorming session. Freedom of expression allows for all ideas to be shared without fear of judgement, respectful communication fosters a positive and open environment, and suspension of criticism ensures that ideas are not shut down prematurely.

Question 3

What is the nature of the relationship between risk of material misstatement and audit risk?
A)Direct.
B)None.
C)Correlational.
D)Inverse.

Accepted Answer

The answer of What is the nature of the relationship...

Question 4

If $15,000 is considered to be material to the income statement,but $25,000 is material to the balance sheet,the auditor should set overall materiality at which of the following dollar amounts?
A)$20,000
B)$25,000
C)$40,000
D)$15,000

Accepted Answer

The answer of If $15,000 is considered to be material...

Question 5

If materiality judgments change during the audit opinion formulation process,what happens to previous evidence collection decisions that were based on the initial judgments?
A)They need to be reassessed.
B)They need to be noted in the footnotes.
C)No action is required.
D)None of the above.

Accepted Answer

If materiality judgments change during the audit opinion formulation process, previous evidence collection decisions that were based on the initial judgments need to be reassessed to ensure that they still support the new materiality judgments.

Question 6

If it is probable that the judgment of a reasonable person will be changed or influenced by the omission or misstatement of information,then that information,which of the following (based on the definition of FASB Statement No.2)best describes that information?
A)Insignificant.
B)Relevant.
C)Significant.
D)Material.

Accepted Answer

According to FASB Statement No.2, information is considered material if its omission or misstatement would change or influence the judgment of a reasonable person. Therefore, the best choice is D - material.

Question 7

Which of the following is a reason a predecessor auditor can decline to reply to a firm's current auditor?
A)Data is under court order.
B)They must always respond.
C)The client does not approve of confidential information being shared.
D)Both A and C are correct.

Accepted Answer

If data is under court order, the predecessor auditor may be legally prohibited from disclosing the information. Additionally, if the client does not approve of confidential information being shared, the predecessor auditor may need to decline to reply in order to maintain the confidentiality of that information. However, there may be situations where the predecessor auditor is required to respond, such as if they are served with a subpoena.

Question 8

Detection risk is controllable by the client.

Accepted Answer

Detection risk is controlled by the auditor through the nature, timing, and extent of auditing procedures.

Question 9

Insistence from the CEO that she must be present at all meetings between the audit committee and internal/external auditors would cause auditors to assess inherent risk at a higher level.

Accepted Answer

When the CEO insists on being present at all meetings between the audit committee and internal/external auditors, it can be seen as a red flag and potentially increase the perceived risk of fraud or manipulation. This is because the CEO's presence could be seen as an attempt to exert undue influence or to limit the scope of the audit, leading auditors to assess inherent risk at a higher level.

Question 10

To learn more about a company and its inherent risks,auditors can use which of the following resources?
A)Management inquiries.
B)Economic statistics.
C)Online searches.
D)Any of the above could be used.

Accepted Answer

To learn more about a company and its inherent risks, auditors can use management inquiries, economic statistics, or online searches. Any of the above could be used depending on the auditor's preference and the specific information needed. Therefore, option D is the correct answer.

Question 11

Detection risk is affected by which aspects of substantive audit procedures?
A)Nature.
B)Timing.
C)Extent.
D)All of the above.

Accepted Answer

Detection risk is affected by the nature, timing, and extent of substantive audit procedures. Nature refers to the type of procedures performed (e.g. observation, examination, confirmation). Timing refers to when the procedures are performed (e.g. interim versus year-end). Extent refers to how much evidence is gathered (e.g. sample size). All of these factors can impact the auditor's ability to detect material misstatements in the financial statements, and therefore affect detection risk.

Question 12

Which of the following ratios provide information about liquidity?
A)Net profit margin.
B)Current ratio.
C)Inventory turnover.
D)Sales to assets.

Accepted Answer

The answer of Which of the following ratios provide information...

Question 13

The quick ratio is useful for analyzing inventory accounts.

Accepted Answer

The quick ratio is designed to evaluate a company's ability to cover its short-term liabilities without relying on inventory sales, focusing on more liquid assets like cash, marketable securities, and receivables.

Question 14

Which of the following best describes the amount of misstatement an auditor is willing to accept and still will not say the account balance is materially misstated?
A)Tolerable misstatement.
B)Performance materiality.
C)A clearly trivial amount.
D)Significant risk.

Accepted Answer

Tolerable misstatement is the amount of misstatement in an account balance that the auditor is willing to accept without concluding that the balance is materially misstated. It is often set at a lower level than performance materiality.

Question 15

The purpose of tests of control is to provide reasonable assurance that internal controls are operating effectively.

Accepted Answer

The purpose of testing controls is to assess the effectiveness of the internal controls in place and provide reasonable assurance that they are operating effectively. This is done to ensure that the financial statements are accurate, reliable, and free from material misstatements. Testing controls is an important part of the audit process and helps the auditor to assess the risk of material misstatement and plan the audit accordingly.

Question 16

Which of the following factors would lead an auditor to assess inherent risk at a higher level?
A)The account balance is easily determined without estimation.
B)The account balance represents an easily embezzled asset.
C)The account balance is composed of simple transactions.
D)All of the above would lead the auditor to assess a higher level of inherent risk.

Accepted Answer

An account balance that represents an easily embezzled asset is more susceptible to material misstatement and fraud, which would lead the auditor to assess a higher level of inherent risk. Choices A and C do not necessarily indicate a higher inherent risk, as an easily determined or simple account balance may still carry risks of material misstatement or fraud.

Question 17

In what way does the risk of material misstatement differ from detection risk?
A)Risk of material misstatement arises because audit procedures have been misapplied.
B)Risk of material misstatement can be controlled and changed by the auditor.
C)Risk of material misstatement can be assessed in quantitative and non-quantitative terms.
D)Risk of material misstatement is controllable by the client.

Accepted Answer

The answer of In what way does the risk of...

Question 18

Which of the following would be a reason that industry and client data were not directly comparable?
A)Broad industry.
B)Use of different accounting principles.
C)Neither of the above.
D)Both A & B are correct.

Accepted Answer

Industry and client data may not be directly comparable due to differences in accounting principles used by different companies and the varying scope of the industries being compared. A broad industry may include companies with vastly different business models and financial structures, making it difficult to accurately compare their financial data. Therefore, both A & B are correct.

Question 19

Which of the following best describes year-to-year comparisons of account balances?
A)Time analyses.
B)Reasonableness tests.
C)Ratio analyses.
D)Trend analyses.

Accepted Answer

Year-to-year comparisons of account balances are best described as trend analyses. This is because trend analyses focus on the direction and magnitude of changes over time, which is what year-to-year comparisons are measuring. Time analyses may also involve looking at changes over time, but this term is more broadly applicable and can refer to any analysis that involves time as a variable. Reasonableness tests are typically used to check for errors or inconsistencies in financial statements, while ratio analyses involve using financial ratios to assess a company's financial health.

Question 20

Which of the following factors will result in control risk being assessed at a higher level?
A)Controls are well designed.
B)There is a lack of supervision of accounting personnel.
C)Accounting staff are well trained and educated.
D)The control environment is operating effectively.

Accepted Answer

A lack of supervision of accounting personnel increases the risk of errors, fraud, and other misstatements, which raises the level of control risk. Options A, C, and D are all factors that would serve to lower the level of control risk instead.

Quiz 7: Planning the Audit: Identifying and Responding to the Risks of Material Misstatement

Which of the following are two frequently used preliminary analytical procedures?

Which of the following are common brainstorming session guidelines?

What is the nature of the relationship between risk of material misstatement and audit risk?

If $15,000 is considered to be material to the income statement,but $25,000 is material to the balance sheet,the auditor should set overall materiality at which of the following dollar amounts?

If materiality judgments change during the audit opinion formulation process,what happens to previous evidence collection decisions that were based on the initial judgments?

If it is probable that the judgment of a reasonable person will be changed or influenced by the omission or misstatement of information,then that information,which of the following (based on the definition of FASB Statement No.2) best describes that information?

Which of the following is a reason a predecessor auditor can decline to reply to a firm's current auditor?

Detection risk is controllable by the client.

Insistence from the CEO that she must be present at all meetings between the audit committee and internal/external auditors would cause auditors to assess inherent risk at a higher level.

To learn more about a company and its inherent risks,auditors can use which of the following resources?

Detection risk is affected by which aspects of substantive audit procedures?

Which of the following ratios provide information about liquidity?

The quick ratio is useful for analyzing inventory accounts.

Which of the following best describes the amount of misstatement an auditor is willing to accept and still will not say the account balance is materially misstated?

The purpose of tests of control is to provide reasonable assurance that internal controls are operating effectively.

Which of the following factors would lead an auditor to assess inherent risk at a higher level?

In what way does the risk of material misstatement differ from detection risk?

Which of the following would be a reason that industry and client data were not directly comparable?

Which of the following best describes year-to-year comparisons of account balances?

Which of the following factors will result in control risk being assessed at a higher level?