Question 1

The assessment of inherent risk requires consideration of matters that have a pervasive effect on the entity as a whole and matters that may affect only specific accounts.Which of the following is an example of a "pervasive effect" matter?
A)Industry of operation.
B)Susceptibility to misappropriation.
C)Sensitivity of valuations to economic factors.
D)All of the above.

Accepted Answer

All of the listed matters can have a pervasive effect on the entity as a whole.

Question 2

For a particular assertion, control risk is the risk that:
A)a material misstatement will occur in the accounting process.
B)audit procedures will fail to detect a weak control system.
C)control procedures will not detect a material misstatement that occurs.
D)the prescribed control procedures will not be applied uniformly.

Accepted Answer

Control risk is the risk that the client's internal controls will not prevent or detect material misstatements. So, option C which says "control procedures will not detect a material misstatement that occurs" is the correct definition of control risk. The other options are not related to control risk. Option A talks about inherent risk, option B talks about detection risk, and option D talks about performance risk.

Question 3

A way to prevent unauthorised access to computer systems is:
A)good access controls.
B)strong firewalls.
C)controls to detect attempts at unauthorised access.
D)all of the above.

Accepted Answer

All of the given options are important in preventing unauthorized access to computer systems. Good access controls ensure that only authorized personnel have access to sensitive information, strong firewalls prevent unauthorized external access to the network, and controls to detect attempts at unauthorized access help to identify and mitigate security threats. Therefore, all of the options together are the best choice to prevent unauthorized access to computer systems.

Question 4

Flowcharts should depict all of the following except:
A)the method of processing.
B)the extent of segregation of duties.
C)the audit procedures conducted.
D)all operations performed in processing the class of transactions.

Accepted Answer

Flowcharts are used to depict the flow of processes and operations, not the audit procedures conducted.

Question 5

For a given assertion, the relationship between the level of detection risk (DR) and assessed control risk (CR) and inherent risk (IR) is shown correctly in which of the following, where + means increase, - means decrease:
A)+DR if +CR and +IR.
B)+DR if -CR and -IR.
C)+DR if +CR and -IR.
D)+DR if -CR and +IR.

Accepted Answer

The answer of For a given assertion, the relationship between...

Question 6

A transaction walk-through review is most commonly associated with:
A)documenting the understanding.
B)tests of controls.
C)substantive tests.
D)procedures to obtain an understanding.

Accepted Answer

The answer of A transaction walk-through review is most commonly...

Question 7

Control activities are detailed policies and procedures that management establishes to help ensure that its directives are carried out.List the four different categories of control activities and give an example of each.

Accepted Answer

The answer of Control activities are detailed policies and procedures...

Question 8

Why is it important to obtain an understanding of the internal control system?
A)Weak internal controls may increase the risk of material misstatement.
B)To determine the level of inherent risk.
C)Because strong internal controls indicate management integrity.
D)All of the above.

Accepted Answer

Understanding the internal control system helps identify areas where there may be a higher risk of material misstatement due to weak controls.

Question 9

The control environment means management's overall attitude, awareness and actions regarding internal control and its importance in the entity.Identify and describe four factors that constitute part of the control environment.

Accepted Answer

The answer of The control environment means management's overall attitude,...

Question 10

Inherent risk is defined in terms of:
A)the existing controls.
B)the standard controls for the client's industry.
C)a total absence of controls.
D)an ideal set of controls.

Accepted Answer

Inherent risk refers to the susceptibility of an assertion to a material misstatement, assuming there are no related controls in place.

Question 11

Which of these is one of the three components of audit risk?
A)Control risk.
B)Rejection risk.
C)Acceptance risk.
D)Deception risk.

Accepted Answer

Control risk is one of the three components of audit risk, along with inherent risk and detection risk.

Question 12

When the lower assessed level of control risk approach is used, the final assessment of control risk is made after completing:
A)the procedures to obtain an understanding.
B)the documentation of the understanding.
C)all the planned tests of controls.
D)all the above.

Accepted Answer

The final assessment of control risk when using the lower assessed level of control risk approach is made after completing all the steps listed: obtaining an understanding of the entity's internal control, documenting this understanding, and performing all the planned tests of controls. These steps are necessary to accurately assess the effectiveness of the entity's internal controls and thus determine the appropriate level of control risk.

Question 13

List the fundamental concepts that are embodied in the definition of internal control as per the COSO report:
…a process, effected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting and compliance.

Accepted Answer

The answer of List the fundamental concepts that are embodied...

Question 14

Which of the following is an example of how an auditor might document the understanding of internal control?
A)Internal control questionnaire.
B)Flow chart and narrative memoranda.
C)Both of the above.
D)None of the above.

Accepted Answer

Auditors can document their understanding of internal control using both internal control questionnaires and flow charts with narrative memoranda.

Question 15

Which of these is not a major advantage of the internal control questionnaire?
A)It may be completed in a mechanical fashion.
B)It reduces errors of omission.
C)It provides guidance for less experienced staff.
D)It is usually developed by experienced professionals.

Accepted Answer

The internal control questionnaire may be completed in a mechanical fashion, which is not an advantage as it can lead to overlooking important details.

Question 16

The least likely procedure to obtain an understanding of the internal control structure would be:
A)confirming transactions.
B)inspecting documents and records.
C)enquiring of appropriate management.
D)reviewing previous experience with the client.

Accepted Answer

Confirming transactions is more related to testing the effectiveness of controls rather than obtaining an understanding of the internal control structure.

Question 17

If inherent risk and control risk are both assessed as low, detection risk will be:
A)the same as audit risk.
B)medium.
C)high.
D)low.

Accepted Answer

Detection risk is inversely related to inherent and control risks. If both are low, detection risk can be higher to maintain an acceptable audit risk level.

Quiz 8: Audit Risk Assessment

The assessment of inherent risk requires consideration of matters that have a pervasive effect on the entity as a whole and matters that may affect only specific accounts.Which of the following is an example of a "pervasive effect" matter?

For a particular assertion, control risk is the risk that:

A way to prevent unauthorised access to computer systems is:

Flowcharts should depict all of the following except:

For a given assertion, the relationship between the level of detection risk (DR) and assessed control risk (CR) and inherent risk (IR) is shown correctly in which of the following, where + means increase, - means decrease:

A transaction walk-through review is most commonly associated with:

Control activities are detailed policies and procedures that management establishes to help ensure that its directives are carried out.List the four different categories of control activities and give an example of each.

Why is it important to obtain an understanding of the internal control system?

The control environment means management's overall attitude, awareness and actions regarding internal control and its importance in the entity.Identify and describe four factors that constitute part of the control environment.

Inherent risk is defined in terms of:

Which of these is one of the three components of audit risk?

When the lower assessed level of control risk approach is used, the final assessment of control risk is made after completing:

Which of the following is an example of how an auditor might document the understanding of internal control?

Which of these is not a major advantage of the internal control questionnaire?

The least likely procedure to obtain an understanding of the internal control structure would be:

If inherent risk and control risk are both assessed as low, detection risk will be: