Question 1

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 2

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 likelihood that errors or fraud could occur, which would increase control risk. Alternatively, choices A, C, and D all suggest that controls are in place and operating effectively, which would decrease control risk.

Question 3

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 data can be collected from a broad range of companies, which can make it difficult to compare directly to a specific client's data. Additionally, different companies may use different accounting principles, which can further complicate direct comparisons. Therefore, both option A (broad industry) and option B (different accounting principles) are correct reasons why industry and client data may not be directly comparable.

Question 4

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

Accepted Answer

Tests of controls are designed to provide reasonable assurance that internal controls are operating effectively. This helps auditors gain confidence in the accuracy and reliability of financial statements. If tests of controls identify deficiencies, auditors can address them and recommend improvements to strengthen internal controls.

Question 5

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

Insistence from the CEO to be present at all meetings between the audit committee and auditors may intimidate the auditors and create an atmosphere of reduced independence, causing them to assess inherent risk at a higher level.

Question 6

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 7

Which of the following phrases or terms regarding materiality is used by the Supreme Court of the United States and is not found in FASB Concepts Statement No. 2?
A) "amount of a misstatement or omission"
B) "in light of surrounding circumstances"
C) "probable that the judgement of a reasonable person"
D) "significantly altered the total mix of information available"

Accepted Answer

The phrase "significantly altered the total mix of information available" is used by the Supreme Court of the United States in its interpretation of materiality, but is not found in FASB Concepts Statement No. 2. The other three choices are all included in both the Supreme Court's interpretation and FASB's definition of materiality.

Question 8

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

Accepted Answer

The amount of misstatement an auditor is willing to accept and still judge that an account balance is not materially misstated is known as tolerable misstatement. It is set by the auditor based on their professional judgement and is lower than the materiality threshold.

Question 9

Which item is correct concerning the risk of material misstatement?
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 must be assessed in non-quantitative terms.
D) Risk of material misstatement is controllable by the client.

Accepted Answer

The risk of material misstatement is primarily under the control of the client because it arises from the client's financial reporting process and the possibility that the financial statements may be materially misstated due to error or fraud. The auditor assesses this risk to plan the audit but cannot control it.

Question 10

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 two commonly used preliminary analytical procedures in auditing. Ratio analyses involve computing ratios using financial statement data to identify unusual relationships or trends. Trend analyses involve the comparison of financial statement data over time to identify changes or unusual patterns.

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. The higher the detection risk, the lower the substantive procedures performed by the auditor, and vice versa. Therefore, it is important for auditors to carefully consider the nature, timing, and extent of their procedures to minimize detection risk and ensure the accuracy of their audit findings.

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 current ratio measures a company's ability to pay its short-term obligations with its short-term assets.

Question 13

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

All three resources (management inquiries, economic statistics, and online searches) can be useful in learning more about a company and its inherent risks. Therefore, any of the above could be used by auditors to gather information about a company.

Question 14

If tolerable misstatement for accounts payable is $1,000, the auditor would need to obtain more audit evidence for that account than if tolerable misstatement were $100,000.

Accepted Answer

This statement is true. When the tolerable misstatement for an account is a small amount, the auditor needs to be more precise in their audit procedures and obtain more evidence to ensure that the account is fairly presented in the financial statements. On the other hand, if the tolerable misstatement is a larger amount, the auditor may be able to rely on broader procedures and still obtain sufficient evidence.

Question 15

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

A predecessor auditor can decline to reply if the data is under court order or if the client does not give approval for confidential information to be shared. They are not required to respond in all cases.

Question 16

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 17

If materiality judgments change during the audit opinion formulation process, what happens to previous audit decisions that were based on the evidence obtained using the initial material setting?
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, all previous audit decisions that were based on the evidence obtained using the initial materiality setting need to be reassessed. This is because these decisions may no longer be relevant or appropriate given the updated materiality threshold.

Question 18

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 is composed of a high volume of nonroutine transactions.
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

A higher level of inherent risk would be assessed if the account balance is composed of a high volume of nonroutine transactions, as these transactions are more complex and subject to greater risk of misstatement. Option A is incorrect because an account balance that is easily determined without estimation would result in a lower level of inherent risk. Option C is also incorrect because simple transactions would also result in a lower level of inherent risk. Option D is incorrect because not all the options would lead to a higher level of inherent risk.

Question 19

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 20

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 typically used in trend analyses, which seek to identify patterns and changes over time. Time analyses are a broader category of techniques that may involve comparing data across different time periods, but they are not specific to account balances. Reasonableness tests may be used to detect anomalies or errors in account balances, but they do not involve comparing balances across different years. Ratio analyses involve calculating and interpreting ratios based on financial data, but they are not specifically focused on year-to-year comparisons.

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

Detection risk is controllable by the client.

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

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

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

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.

The quick ratio is useful for analyzing inventory accounts.

Which of the following phrases or terms regarding materiality is used by the Supreme Court of the United States and is not found in FASB Concepts Statement No. 2?

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

Which item is correct concerning the risk of material misstatement?

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

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

Which of the following ratios provide information about liquidity?

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

If tolerable misstatement for accounts payable is $1,000, the auditor would need to obtain more audit evidence for that account than if tolerable misstatement were $100,000.

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

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 audit decisions that were based on the evidence obtained using the initial material setting?

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

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

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