Chapter 9

If an auditor believes the chance of financial failure is high and there is a corresponding increase in business risk for the auditor, acceptable audit risk would likely A) be reduced. B) be increased. C) remain the same. D) be calculated using a computerized statistical package.

A; be reduced

Which of the following would not increase the risks of material misstatement at the overall financial statement level? A) effective oversight by the board of directors B) deficiencies in management's integrity C) inadequate accounting systems D) all of the above

A; effective oversight by the board of directors

When management has an adequate level of integrity for the auditor to accept the engagement but cannot be regarded as completely honest in all dealings, auditors normally A) reduce acceptable audit risk and increase inherent risk. B) reduce inherent risk and control risk. C) increase inherent risk and control risk. D) increase acceptable audit risk and reduce inherent risk.

A; reduce acceptable audit risk and increase inherent risk

Auditors typically rely on internal controls of their private company clients A) only as needed to complete the audit and satisfy Sarbanes-Oxley requirements. B) only if the controls are determined to be effective. C) only if the client asks an auditor to test controls. D) only if the controls are sufficient to increase control risk to an acceptable level.

B; only if the controls are determined to be effective

Which of the following will generally be considered a significant risk? A) a sale to a customer B) the determination of the amount of bad debt expense C) the purchase of inventory D) obtaining a loan from the bank

B; the determination of the amount of bad debt expense

Auditors respond to risk primarily by I. changing the extent of testing. II. changing the types of audit procedures. A) I only B) II only C) I and II D) neither I nor II

C; I and II

Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance instead of A) detection risk. B) audit report risk. C) acceptable audit risk. D) inherent risk.

C; acceptable audit risk

Which of the following is a correct statement? A) There is no relationship between materiality and risk in auditing. B) Risk is a measure of magnitude or size. C) The combination of performance materiality and the audit risk model factors determines planned audit evidence. D) Performance materiality is part of the audit risk model.

C; the combination of performance materiality and the audit risk model factors determines planned audit evidence

A ________ risk represents an identified and assessed risk of material misstatement that, in the auditor's professional judgment, requires special audit consideration. A) material B) substantial C) financial statement D) significant

D; significant

When dealing with audit risk A) auditors cannot accept any level of risk in performing the audit function. B) most risks that auditors encounter are relatively easy to measure. C) the audit risk model is only used for classes of transactions. D) the audit risk model helps the auditor to decide how much and what types of evidence to accumulate.

D; the audit risk model helps the auditor to decide how much and what types of evidence to accumulate

The risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality levels is A) audit risk. B) control risk. C) inherent risk. D) planned detection risk.

D; planned detection risk

Which of the following is not a primary consideration when assessing inherent risk? A) nature of client's business B) existence of related parties C) effectiveness of internal controls D) susceptibility to misappropriation of assets

C; effectiveness of internal

________ is the risk that the auditor or audit firm will suffer harm after the audit is finished, even though the audit report was correct. A) Inherent risk B) Audit risk C) Engagement risk D) Control risk

C; engagement risk

________ risk represents the auditor's assessment of the susceptibility of an assertion to material misstatement, before considering the effectiveness of the client's internal control. A) Material B) Account balance C) Control D) Inherent

D; inherent

Inherent risk is ________ related to planned detection risk and ________ related to the amount of audit evidence. A) directly; inversely B) directly; directly C) inversely; inversely D) inversely; directly

D; inversely; directly

Which of the following statements is not true? A) Inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related to the amount of audit evidence required. B) Inherent risk is directly related to evidence whereas detection risk is inversely related to the amount of audit evidence required. C) Inherent risk is the susceptibility of the financial statements to material error, assuming no internal controls. D) Inherent risk and control risk are assessed by the auditor and function independently of the financial statement audit.

A; inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related to the amount of audit evidence required

Inherent risk is often high for an account such as A) inventory. B) land. C) capital stock. D) notes payable.

A; inventory

Which of the following is an accurate statement regarding inherent risk? A) The profession has established guidelines for setting inherent risk. B) Auditors are generally conservative in setting inherent risk. C) Factors impacting inherent risk will affect all cycles, balances, and disclosures. D) Inherent risk has no impact on the amount of evidence gathered.

B; auditors are generally conservative in setting inherent risk

Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would A) increase materiality levels. B) decrease detection risk. C) decrease substantive testing. D) increase inherent risk.

B; decrease detection risk

If the auditor decides to reduce acceptable audit risk, planned detection risk A) increases. B) decreases. C) stay the same. D) cannot be determined.

B; decreases

Risk of material misstatement at the assertion level A) is only relevant to account balances. B) determines the nature, timing, and extent of further audit procedures. C) refers to risks that are pervasive to the financial statements as a whole. D) consists of business risk and inherent risk.

B; determines the nature, timing, and extent of further audit procedures

The measurement of the auditor's assessment of the susceptibility of an assertion to material misstatement, before considering the effectiveness of related internal controls is defined as A) audit risk. B) inherent risk. C) sampling risk. D) detection risk.

B; inherent risk

When using the audit risk model, A) auditors find it relatively easy to measure the components of the model. B) many auditors use broad and subjective measurement terms. C) auditors find it easy to measure the amount of evidence implied by a given planned detection risk. D) auditors are only concerned with understating accounts.

B; many auditors use broad and subjective measurement terms

In a financial statement audit, inherent risk is evaluated to help an auditor asses which of the following? A) the internal audit department's objectivity in reporting a material misstatement of a financial statement assertion it detects to the audit committee B) the risk the internal control system will not detect a material misstatement of a financial statement assertion C) the risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion D) the susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls

D; the susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls

Planned detection risk I. determines the amount of substantive evidence the auditor plans to accumulate. II. is dependent on inherent risk and business risk. A) I only B) II only C) I and II D) neither I nor II

A; I only

To what extent do auditors typically rely on internal controls of their public company clients? A) extensively B) only very little C) infrequently D) never

A; extensively

If planned detection risk is reduced, the amount of evidence the auditor accumulates will A) increase. B) decrease. C) remain unchanged. D) be indeterminate.

A; increase

When taken together, the concepts of risk and materiality in auditing A) measure the uncertainty of amounts of a given magnitude. B) measure uncertainty only. C) measure magnitude only. D) measure inherent risk.

A; measure the uncertainty of amounts of a given magnitude

Auditors begin their assessments of inherent risk during audit planning. Which of the following would not help in assessing inherent risk during the planning phase? A) obtaining client's agreement on the engagement letter B) obtaining knowledge about the client's business and industry C) touring the client's plant and offices D) identifying related parties

A; obtaining client's agreement on the engagement letter

Inherent risk and control risk A) are inversely related to each other. B) are inversely related to detection risk. C) are directly related to detection risk. D) are directly related to audit risk.

B; are inversely related to detection risk

Which is a true statement about audit risk? A) Audit risk measures the risk that a material misstatement could occur and not be detected by internal control. B) When auditors decide on a higher acceptable audit risk, they want to be more certain that the financial statements are not materially misstated. C) Audit assurance is the complement of acceptable audit risk. D) There is an inverse relationship between acceptable audit risk and planned detection risk.

C; audit assurance is complement of acceptable audit risk

When assessing risk, it is important to remember that A) for acceptable audit risk, the SEC decides the risk the CPA firm should take for public clients. B) inherent risk can be changed by the auditor. C) detection risk can only be determined after audit risk, inherent risk, and control risk are determined. D) control risk is determined by company management since they are responsible for internal control.

C; detection risk can only be determined after audit risk, internet risk, and control risk are determined

Which of the following statements regarding inherent risk is correct? A) Inherent risk is unaffected by the auditor's experience with client's organization. B) Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows that it was incorrect. C) Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain more knowledge about the company. D) Inherent risk is dependent upon the strengths in client's internal control system.

C; most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain more knowledge

Risk assessment procedures include A) a required discussion among the staff members of the audit and the client regarding material misstatements in the financial statement. B) determination of the type of audit opinion to issue. C) observation of the entity's operations. D) assessing acceptable audit risk.

C; observation of the entity's operations

Which of the following is a correct relationship? A) Acceptable audit risk and planned detection risk have an inverse relationship. B) Control risk and planned detection risk have a direct relationship. C) Planned detection risk and inherent risk have an inverse relationship. D) All of the above are correct relationships.

C; planned detection risk and inherent risk have an inverse relationship

The auditor's responsibility section in an audit report states that "...the standards require that we plan and perform the audit to obtain ________ assurance about whether the financial statements are free of material misstatement." What type of assurance is given? A) immediate B) limited C) reasonable D) absolute

C; reasonable

The risk of material misstatement refers to A) control risk and acceptable audit risk. B) inherent risk. C) the combination of inherent risk and control risk. D) inherent risk and audit risk.

C; the combination of inherent risk and control risk

1) Risk assessment procedures include inquiries of management and others by the auditor. As part of these procedures, the auditor should talk to A) internal auditors. B) board of directors. C) individuals involved with regulatory compliance. D) all of the above.

D; all above

When the auditor is attempting to determine the extent to which external users rely on a client's financial statements, they may consider several factors except for A) client size. B) concentration of ownership. C) nature and amounts of liabilities. D) assessment of detection risk.

D; assessment of detection risk

When considering the risk of misstatement due to fraud, A) the risk of not detecting a material misstatement due to fraud is lower than the risk of not detecting a misstatement due to error. B) the risk is only made at the financial statement level. C) auditing standards require the auditor to presume that risk of fraud exist in expense transactions. D) auditing standards outline procedures the auditor should perform to obtain information from management about their consideration of fraud.

D; auditing standards outline procedures the auditor should perform to obtain information from management about their consideration

An auditor who audits a business cycle that has low inherent risk should A) increase the amount of audit evidence gathered. B) assign more experienced staff to that area. C) expand planning procedures. D) do none of the above.

D; do none of the above

Which of the following is true regarding audit risk for segments? A) Control risk must be assessed at the same level for all accounts. B) Factors affecting inherent risk do not differ from account to account. C) Acceptable audit risk is ordinarily assessed by the auditor during the substantive test of balances phase and is held constant for each major cycle and account. D) In some cases, a lower acceptable audit risk may be more appropriate for one account than for others.

D; in some cases, a lower acceptable audit risk may be more appropriate for one account than for others