Chapter 7 – Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
a.
Management inquiries.
b.
Economic statistics.
c.
Online searches.
d.
Any of the above could be used.
AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
United States – AK – AICPA BB-Critical thinking
55. 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.
AUDT.JOHN.16.118 – Assess Factors Affecting Inherent Risk
United States – AK – AICPA BB-Critical thinking
56. Which of the following factors will result in control risk being assessed at a higher level?
a.
b.
c.
d.
AUDT.JOHN.16.119 – Assess Factors Affecting Control Risk
United States – AK – AICPA BB-Critical thinking
57. 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.
58. 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.
AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
United States – AK – AICPA BB-Critical thinking
59. Which of the following ratios provide information about liquidity?
a.
Net profit margin.
b.
Current ratio.
c.
Inventory turnover.
d.
Sales to assets.
AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
United States – AK – AICPA BB-Critical thinking
60. 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.
AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
United States – AK – AICPA BB-Critical thinking
61. 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.
62. What is the main reason to establish guidelines for brainstorming sessions?
a.
To not hurt feelings.
b.
It is required by the SEC.
c.
To encourage interactive and constructive group dialogue and idea exchange.
d.
To pass information up to top-level management efficiently.
1
AUDT.JOHN.16.120 – Preliminary Analytical Procedures and Brainstorming
United States – AK – AICPA BB-Critical thinking
63. What type of relationship exists between audit risk and detection risk?
a.
Direct.
b.
Inverse.
c.
Indirect.
d.
No relationship.
1
AUDT.JOHN.16.117 – Risks of Material Misstatement
United States – AK – AICPA BB-Critical thinking
64. What is the typical range for the setting of audit risk?
a.
1% – 10%
b.
1% – 5%
c.
0% – 5%
d.
0% – 10%
b
1
AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
United States – AK – AICPA BB-Critical thinking
65. Which of the following would be the likely risk results from using a 1% level of detection risk?
a.
High detection risk and low audit risk.
b.
High detection risk and high audit risk.
c.
Low detection risk and high audit risk.
d.
Low detection risk and low audit risk.
United States – AK – AICPA BB-Critical thinking
66. What is the typical range for the assessment of the risk of material misstatement?
a.
0% – 100%
b.
0% – 10%
c.
0% – 5%
d.
1% – 100%
1
AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
United States – AK – AICPA BB-Critical thinking
67. As inherent risk increases, and other risk factors remain constant, what happens to the extent of audit work?
a.
Increases.
b.
Decreases.
c.
Stays the same.
d.
Becomes less reliable.
1
and Plan Audit Procedures
United States – AK – AICPA BB-Critical thinking
68. Which of the following statements best describes what is meant by setting control risk at100%?
a.
Controls are effective.
b.
Controls are relevant.
c.
Controls are ineffective.
d.
Cannot be determined from the information given.
1
and Plan Audit Procedures
United States – AK – AICPA BB-Critical thinking
69. If the auditor’s assessment of audit risk is low (e.g., 1% rather than 5%), what is the effect on the amount of
direct testing performed by the auditor?
a.
Increase in direct testing.
1
AUDT.JOHN.16.121 – Decisions about Detection Risk and Audit Risk
United States – AK – AICPA BB-Critical thinking
Chapter 7 – Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
b.
Decrease in direct testing
c.
No change in direct testing.
d.
Direct testing is not needed.
and Plan Audit Procedures
United States – AK – AICPA BB-Critical thinking
70. Which of the following terms best describes the numerical depiction of the relationship between control
risk, inherent risk, detection risk, and audit risk?
a.
Audit risk model.
b.
Risk of misstatement model.
c.
Significance model.
d.
Materiality equation.
and Plan Audit Procedures
United States – AK – AICPA BB-Critical thinking
71. When an auditor chooses not to rely on a client’s internal controls because the control design is ineffective,
which of the following tests are eliminated?
a.
Substantive testing.
b.
Tests of controls.
c.
Tests of details of balances.
d.
Substantive analytical procedures.
and Plan Audit Procedures
United States – AK – AICPA BB-Critical thinking
72. Which of the following terms best describes the types and appropriateness of audit procedures used?
a.
Nature of detection risk.
b.
Material misstatement risk.
c.
Nature of auditing procedures.
d.
Nature of risk response.
73. Appropriateness addresses which aspect of audit procedures?
a.
Relevance.
b.
Reasoning.
c.
Reliability.
d.
Both A & C.
d
1
and Plan Audit Procedures
United States – AK – AICPA BB-Critical thinking
74. Which of the following best describes what is meant by the timing of risk response?
a.
Where procedures are conducted.
b.
When procedures are conducted.
c.
How procedures are conducted.
d.
Who conducts the procedures.
b
1
and Plan Audit Procedures
United States – AK – AICPA BB-Critical thinking
75. What is the auditor trying to accomplish by varying the timing of audit procedures from the prior year?
a.
Introduce unpredictability.
b.
Confuse the client.
c.
Gather information during different times of the year.
d.
Finish the audit sooner.
1
and Plan Audit Procedures
United States – AK – AICPA BB-Critical thinking
76. Which of the following approaches can be used to introduce unpredictability into the audit?
1
and Plan Audit Procedures
United States – AK – AICPA BB-Critical thinking
Chapter 7 – Planning the Audit: Identifying and Responding to the Risks of Material Misstatement
a.
Assessing high risk accounts.
b.
Performing procedures on an unannounced basis.
c.
Performing the audit in the same location each year.
d.
Selecting items that would normally be tested.
United States – AK – AICPA BB-Critical thinking
77. What procedure has to be completed at or after the end of the period?
a.
Assessment of control risk.
b.
Engagement letter.
c.
Evaluation of adjusting journal entries.
d.
All procedures must be completed prior to period end.
and Plan Audit Procedures
United States – AK – AICPA BB-Critical thinking
78. An increase in the risk of material misstatement would lead to which of the following responses?
a.
Increase in the extent of auditing procedures.
b.
Decrease in the extent of auditing procedures.
c.
No change in the extent of auditing procedures.
d.
No change in the extent of audit procedures.
and Plan Audit Procedures
79. Which of the following risk factors suggests a heightened level of risk of material misstatement?
a.
Having a stable product.
b.
The departure of key personnel of a company.
c.
Few immaterial related-party transactions.
d.
Declining a merger with another company.
80. Which of the following terms best describes the risk that audit procedures will fail to detect misstatements
exceeding tolerable misstatement?
a.
Audit risk.
b.
Control risk.
c.
Detection risk.
d.
Inherent risk.
1
AUDT.JOHN.16.07-02 – LO: 07-02
United States – BUSPORG: Analytic
United States – AK – AICPA BB-Critical thinking
Identifying and Assessing Risks of Material Misstatement
81. As the risk of material misstatement increases, what happens with detection risk?
a.
Medium increase.
b.
Stay the same.
c.
Decrease.
d.
Severely increase.
1
AUDT.JOHN.16.117 – Risks of Material Misstatement
United States – AK – AICPA BB-Critical thinking
82. In which of the following situations will auditors typically rely on internal controls over financial reporting?
a.
If control risk is assessed at a high level.
b.
If the controls are determined to be designed and operating effectively.
c.
If the clients asks the auditor to test controls.
d.
If the controls are sufficient to increase control risk to an acceptable level.
b
1
AUDT.JOHN.16.07-04 – LO: 07-04
United States – BUSPORG: Analytic
AUDT.JOHN.16.117 – Risks of Material Misstatement
United States – AK – AICPA BB-Critical thinking
83. The risk of material misstatement refers to which of the following?
a.
Inherent risk.
b.
Control risk and acceptable audit risk.
c.
The combination of inherent risk and control risk.
d.
Inherent risk and audit risk.
AUDT.JOHN.16.117 – Risks of Material Misstatement
United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
84. Which of the following statements is false?
a.
Inherent risk is inversely related to the level of control risk.
b.
Inherent risk is directly related to the amount of evidence required in account testing.
c.
Inherent risk is the susceptibility of the financial statements to material misstatement, assuming no
internal controls.
d.
Inherent risk and control risk are assessed by the auditor and controlled by the client.
AUDT.JOHN.16.07-03 – LO: 07-03
United States – BUSPORG: Analytic
Assessing Factors Affecting Inherent Risk
85. Which of the following is a factor that would cause an increase in the assessment of control risk?
a.
New products have uncertain likelihood of success
b.
Little interaction between senior management and operating staff
c.
A new business strategy is improperly implemented.
d.
The industry is mature and declining.
AUDT.JOHN.16.07-04 – LO: 07-04
United States – BUSPORG: Analytic
United States – AK – AACSB-Analytical skills
United States – AK – AICPA BB-Critical thinking
Assessing Factors Affecting Control Risk
86. Qualitative reasons for materiality
List the reasons why an amount that is quantitatively immaterial might be considered material due to qualitative
reasons.
87. Inherent risk
List some factors that would lead an auditor to assess inherent risk relating to operations at a higher level.
88. Brainstorming
What are the steps of the brainstorming process?
89. Risk Responses
When considering risk responses, what steps should the auditor take?
90. Importance of materiality judgments
Explain the differences between performance materiality and tolerable misstatement.
91. Relationships between risks
Identify how an increase in each of the following factors (assuming the other factors remain unchanged) will
affect planned audit evidence.
Audit risk,
∙ Inherent risk,
∙ Control risk,
∙ Detection risk,
∙ Tolerable misstatement
92. Predecessor auditor
Discuss the required communications between predecessor and successor auditors.