A424 - Chapter 7

Which of the following statements is true concerning the concept of performance materiality? a. Performance materiality is set less than overall materiality and helps the auditor determine the extent of audit evidence. b. If performance materiality is set too low, the auditor might not perform sufficient procedures to detect material misstatements in the financial statements. c. If performance materiality is set too high, the auditor might perform more substantive procedures than necessary. d. Performance materiality is essentially the same posting materiality. e. All of the above are true.

A

Which of the following statements is true regarding the concept of control risk? a. When control risk is high, the auditor is concerned that a misstatement may not be prevented, or that if a misstatement exists in the organization's financial statements that it will not be detected, and therefore corrected by management. b. Some organizations have zero control risk because they have made a significant commitment to the effective design and operation of controls. c. Control risk relates to the susceptibility of an assertion to a misstatement, due to either error or fraud, before consideration of any related controls. d. All of the above are true.

A

Assume for Client X that inherent risk is assessed at 30%, control risk is assessed at 100%, audit risk is 5%, and detection risk is therefore determined to be 17%. Assume for Client Z that inherent risk is assessed at 100%, control risk is assessed at 100%, audit risk is 1%, and detection risk is therefore determined to be 1%. What is true about the amount of audit work that will need to be conducted? a. Client X will require more audit work than Client Z. b. Client Z will require more audit work than Client X. c. Both clients will require a similar amount of audit work. d. The auditor will most likely resign from the Client Z audit because the inherent risk and control risk are so high.

B

Which of the following statements represent the appropriate directional relationships between the concepts of inherent risk, control risk, audit risk, and detection risk? a. As inherent risk goes up, audit risk goes up. b. As inherent risk goes up, audit risk goes down. c. As control risk goes up, detection risk goes up. d. As control risk goes up, inherent risk goes down.

B

Assume that the auditor sets audit risk at a low level, equal to 1%. What is the appropriate interpretation of this level of audit risk? a. The auditor is willing to take only a 1% chance that audit procedures will not detect a material misstatement. b. The auditor is 99% confident that the audit procedures will detect a material misstatement. c. The auditor is willing to take only a 1% chance of expressing an audit opinion that the financial statements are fairly presented when they are materially misstated. d. The auditor is 99% confident that the audit opinion is correct.

C

Which of the following characteristics would lead the auditor to assess inherent risk relating to financial reporting at a higher level? a. The account balance represents an asset that is relatively easily stolen. b. The controls over the account balance are weak. c. The company has a history of exactly meeting analyst estimates. d. The company is in an industry that is mature and declining.

C

Which of the following statements is false regarding brainstorming? a. Brainstorming is a group discussion designed to encourage auditors to creatively assess client risks, particularly those relevant to the possible existence of fraud in an organization. b. Brainstorming predominantly occurs during the early planning phases of the audit. c. To facilitate the generation and evaluation of quality ideas during the brainstorming session, a typical practice during brainstorming is to invite criticism and value judgments about ideas generated. d. Participants are encouraged to provide more ideas rather than fewer, with the intent to generate a variety of possible risk assessment scenarios that can be explored during the conduct of the audit. e. All of the above are true.

C

Which of the following statements is false regarding the nature, timing, and extent of risk responses? a. The nature of risk response refers to the types of audit procedures applied given the nature of the account balance and the most relevant assertions regarding that account balance. b. The timing of risk response refers to when audit procedures are conducted and whether those procedures are conducted at announced or predictable times. c. When the risk of material misstatement is low, the auditor conducts the audit procedures closer to year end, on an unannounced basis, and includes some element of unpredictability in the timing of procedures. d. The extent of risk response refers to the sufficiency of evidence that is necessary given the client's assessed risks, materiality, and the acceptable level of audit risk.

C

Inherent risk is present in organizations at which of the following levels? a. At the assertion level. b. At the financial statement level in terms of business risk relating to operations. c. At the financial statement level in terms of financial reporting. d. All of the above.

D

Which of the following statements is true regarding analytical techniques? a. Ratio analysis takes advantage of economic relationships between two or more accounts. b. Ratio and trend analysis are generally carried out through a comparison of client data with expectations based on industry data, prior-period data, and expectations developed from industry trends, client budgets, and so on. c. Developing expectations is the first step in performing analytical procedures. d. All of the above are true.

D

Which of the following statements is true regarding the concept of materiality? a. Materiality is the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. b. Materiality is the magnitude of an omission or misstatement of accounting information that, in light of surrounding circumstances, makes it possible that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. c. A fact is material if there is a substantial likelihood that the fact would have been viewed by the reasonable investor as having significantly altered the total mix of information made available. d. Both (a) and (c) are correct. e. Both (b) and (c) are correct.

D

When considering responses to risk at the individual assertion level, the auditor should do which of the following? a. Evaluate the reasons for the assessed risk of material misstatement. b. Estimate the likelihood of material misstatement due to the inherent risks of the client. c. Consider the role of internal controls, and determine whether control risk is relatively high or low, thereby determining whether the auditor should rely on controls or whether the auditor needs to conduct a more substantive audit. d. Obtain more relevant and reliable audit evidence as the auditor's assessment of the risk of material misstatement increases. e. All of the above.

E

Which of the following characteristics would lead the auditor to assess control risk at a higher level? a. It is difficult for the auditor to determine or gain access to the organization or individuals who own and/or control the entity. b. The organization has inadequate accounting staff, or the staff lacks requisite expertise. c. There exists a lack of supervision of accounting personnel. d. The organization has inadequate information and communication systems. e. All of the above.

E

Which of the following statements is true regarding the concept of detection risk? a. After assessing inherent and control risk and determining the level of acceptable audit risk, the auditor determines detection risk. b. Detection risk is under the control of the auditor, and the level of audit effort that the auditor expends on the engagement depends on the level of detection risk. c. When the risk of material misstatement is higher, detection risk is lower in order to reduce audit risk to an acceptable level. d. The auditor controls detection risk through the nature, timing, and extent of substantive audit procedures. e. All of the above are true.

E

A high level of detection risk means that the audit firm is willing to take accept a low risk of not detecting a material misstatement.

False

Detection risk is the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material before consideration of related controls.

False

Each of the following factors would lead the auditor to assess control risk at a higher level: the company lacks personnel or expertise to deal with changes in the industry, there exist significant supply chain risks, the industry is mature and declining, and there exist regulatory requirements that increase legal exposure.

False

Inherent risk at the financial statement level is not affected by the competence and integrity of management or their potential incentives to misstate the financial statements.

False

Material misstatements refer only to intentional misstatements that exist in a transaction or financial statement account balance.

False

The nature of risk response refers to the sufficiency and appropriateness of evidence that is necessary given the client's assessed risks, materiality, and the level of audit risk that is deemed acceptable.

False

When conducting trend analysis, it is important that the auditor not develop expectations and establish decision rules in advance; doing so would make it more difficult for the auditor to identify unexpected results for additional investigation

False

When performing preliminary analytical procedures and evaluating the results of those procedures, it is important that the auditor discusses the results with management before identifying hypotheses to explain the results; by discussing with management the auditor will be better able to identify alternative explanations.

False

Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

True

In terms of the timing of the risk response, the following procedures can be completed only at or after period end: comparing the financial statements to the accounting records, evaluating adjusting journal entries made by management in preparing the financial statements, and conducting procedures to response to risks that management may have engaged in improper transactions at period end.

True

Inherent risks at the financial statement level include factors that could threaten the fundamental financial viability of the organization.

True

Performance materiality is set less than overall materiality and helps the auditor determine the extent of audit evidence needed.

True

Some level of control risk is always present in an organization because of the inherent limitations of internal control.

True

The interpretation of audit risk set at a low level (1%) is that the auditor is willing to take only a 1% chance of expressing an audit opinion that the financial statement are fairly presented when they are materially misstated.

True