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| 1 | |
Audit risk is typically considered and assessed: |
| | A) | At the assertion level. |
| | B) | At the account balance level. |
| | C) | For the financial statements as a whole. |
| | D) | All of the above. |
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| 2 | |
The existence of audit risk is recognized by the statement in the audit report that the auditor |
| | A) | Obtains reasonable assurance about whether the financial statements are free of material misstatement. |
| | B) | Assesses the accounting principles used and evaluates the overall financial statement presentation. |
| | C) | Realizes that some matters, either individually or in the aggregate, are important, while other matters are not important. |
| | D) | Is responsible for expressing an opinion on the financial statements, which are the responsibility of management. |
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| 3 | |
Which of the following factors would an auditor least likely consider when assessing the inherent risk associated with sales transactions? |
| | A) | Billings are made using the percentage-of-completion method of revenue recognition. |
| | B) | The nature of the credit authorization process. |
| | C) | Some invoices are normally billed prior to shipments [which occur at a later date]. |
| | D) | The conditions of the sale allow for a right of return or the right to modify the purchase agreement. |
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| 4 | |
Risk of material misstatement refers to a combination of which two 'client' components of the audit risk model? |
| | A) | Audit risk and inherent risk. |
| | B) | Audit risk and control risk. |
| | C) | Inherent risk and control risk. |
| | D) | Control risk and detection risk. |
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| 5 | |
The risk that an auditor’s procedures will lead to a conclusion that a material misstatement in an account balance does not exist when, in fact, a misstatement does exist, is known as: |
| | A) | Audit risk. |
| | B) | Detection risk. |
| | C) | Inherent risk. |
| | D) | Business risk. |
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| 6 | |
One of your clients recently upgraded their accounting system from a medium-scale general ledger package to a complex state-of-the-art enterprise resource planning system. This installation took place over the last nine months of the entity’s fiscal year and is nearly 100 per cent complete by the balance sheet date. Which of the following best describesthe main effect of this event on the audit risk model for the current year? |
| | A) | It will likely increase the risk of material misstatement. |
| | B) | It will likely decrease the risk of material misstatement. |
| | C) | It will likely decrease the audit risk. |
| | D) | It will likely increase the detection risk. |
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| 7 | |
The auditor obtains an understanding of the entity and its environment by performing all of the following assessment procedures except: |
| | A) | Inquiries of management and others. |
| | B) | Compute the level of detection risk. |
| | C) | Analytical procedures. |
| | D) | Observation and inspections. |
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| 8 | |
Which of the following characteristics most likely would heighten an auditor’s concern about the risk of intentional manipulation of financial statements? |
| | A) | Turnover of senior accounting personnel is low. |
| | B) | Insiders recently purchased additional shares of the entity’s stock. |
| | C) | Management places substantial emphasis on meeting earnings projections. |
| | D) | The rate of change in the entity’s industry is slow. |
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| 9 | |
Which of the following is a misappropriation of assets? |
| | A) | Classifying inventory held for resale as supplies. |
| | B) | Investing cash and earning a 3 per cent rate of return as opposed to paying off a loan with an interest rate of 7 per cent. |
| | C) | An employee of a consumer electronics store steals 12 CD players. |
| | D) | Management estimates bad debt expense as 2 per cent of sales when it actually expects bad debts equal to 10 per cent of sales. |
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| 10 | |
Which of the following would be classified as an error? |
| | A) | Misinterpretation by management of facts that existed when the financial statements were prepared. |
| | B) | Misappropriation of assets for the benefit of management. |
| | C) | Preparation of records by employees to cover a fraudulent scheme. |
| | D) | Intentional omission of the recording of a transaction to benefit a third party. |
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| 11 | |
Which of the following represents a factual misstatement? |
| | A) | A misstatement that management knows about, but the auditor does not. |
| | B) | A misstatement found by the auditor that is due to incorrect pricing on a sales invoice. |
| | C) | A misstatement arising from the differences between the auditor’s estimate and management’s estimate of the allowance for doubtful accounts. |
| | D) | A misstatement based on an auditor’s projection of an error found in a sample. |
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| 12 | |
Which of the following factors is least likely to represent an opportunity to commit fraud? |
| | A) | The audit committee is ineffective. |
| | B) | Poor internal controls over cash transactions. |
| | C) | The existence of highly complex transactions. |
| | D) | Operating losses make a hostile takeover imminent. |
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| 13 | |
When is a duty to disclose fraud to parties other than the client’s senior management and those charged with governance most likely to exist? |
| | A) | When the amount is material. |
| | B) | When the fraud results from misappropriation of assets rather than fraudulent financial reporting. |
| | C) | In response to inquiries from a successor auditor. |
| | D) | When a line manager rather than a lower-level employee commits the fraudulent act. |
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| 14 | |
Auditing standards require auditors to make certain inquiries of management regarding fraud. Which of the following inquiries is required? |
| | A) | Whether management has ever intentionally violated the securities laws. |
| | B) | Whether management has any knowledge of fraud that has been perpetrated on or within the entity. |
| | C) | Management’s attitudes toward regulatory authorities. |
| | D) | Management’s attitude about hiring ethical employees. |
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| 15 | |
Which of the following is an example of fraudulent financial reporting? |
| | A) | Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales. |
| | B) | An employee diverts customer payments to his personal use, concealing his actions by debiting an expense account, thus overstating expenses. |
| | C) | An employee steals inventory, and the shrinkage is recorded as a cost of goods sold. |
| | D) | An employee borrows small tools from the company and neglects to return them; the cost is reported as a miscellaneous operating expense. |
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| 16 | |
If risk of material misstatement is higher than originally anticipated, the auditor may respond by: |
| | A) | Increasing supervision. |
| | B) | Reducing control risk. |
| | C) | Reducing inherent risk. |
| | D) | None of the above. |
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| 17 | |
If the auditor determines that a material misstatement may be due to fraud, the auditor should do all of the following except: |
| | A) | Attempt to obtain evidence to determine whether the misstatement was, in fact, due to fraud. |
| | B) | Discuss the findings with an appropriate level of management. |
| | C) | Alert the authorities. |
| | D) | Suggest that management consult with legal counsel. |
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| 18 | |
If acceptable audit risk is set at low and the assessed risk of material misstatement is high, then detection risk must be: |
| | A) | High. |
| | B) | Moderate. |
| | C) | Low. |
| | D) | Cannot determine detection risk from the information given. |
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| 19 | |
Which of the following statements is false as it relates to the auditor’s responsibility to document the risk assessment? |
| | A) | The documentation may include the use of questionnaires. |
| | B) | Management’s response to high-risk areas identified by the auditor should be included in the documentation. |
| | C) | The level of risk must be set quantitatively (i.e. inherent risk is 60 per cent). |
| | D) | All of the above are false. |
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