Test 2

Which of the following statements regarding risk assessment is correct?

An auditor's assessment of control risk at a low level can help to offset a higher level of inherent risk

In an audit of a nonissuer's financial statements, projected misstatement is

An auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample

The acceptable level of detection risk is inversely related to the

Assurance provided by substantive tests

The existence of audit risk is recognized by the statement in the auditor's standard report that the

Auditor obtains reasonable assurance about whether the financial statements are free of material misstatement

Detection risk differs from both control risk and inherent risk in that detection risk

Can be changed at the auditor's discretion

Which of the following risks may be assessed in nonquantitative terms?

Control: Yes, Detection: Yes, Inherent: Yes

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk, and therefore the risk of material misstatement, 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

Decrease detection risk

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed risk of material misstatement 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

Decrease detection risk

Which of the following types of risk increases when an auditor performs substantive analytical audit procedures for financial statement accounts at an interim date?

Detection

Which of the following types of risks most likely would increase if accounts receivable are confirmed three months before year-end?

Detection

An auditor uses the assessed level of control risk to

Determine the acceptable level of detection risk for financial statement assertions

Which of the following best describes a type of judgmental misstatement?

Differences between management and the auditor's judgement regarding estimates

Which of the following should an auditor do when control risk is assessed at the maximum level?

Document the assessment

The auditor is in the process of assessing the risk of material misstatement for selected material client transactions and account balances. If the auditor decides to change the level of detection risk based on new information pertaining to the risk of material misstatement, he or she may do all of the following except for

Eliminating the use of substantive procedures for certain relevant assertions if the assessed risk of material misstatements sufficiently declines

Inherent risk and control risk differ from detection risk in that they

Exist independently of the financial statement audit

When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor most likely would increase the

Extent of tests of details

When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the

Extent of tests of details

When an auditor increases the planned assessed level of control risk because certain control activities were determined to be ineffective, the auditor would most likely increase the

Extent of tests of details

Which of the following statements regarding control risk is true?

If control risk is assessed at a high level, substantive testing is likely to be more more heavily emphasized in the audit process

Which of the following is true?

If the assessed level of fraud risk is high, the auditor should attempt to reduce detection risk

An auditor assesses control risk because it

Indicates to the auditor where inherent risk may be the greatest

By obtaining an understanding of the client and its internal control environment, the auditor is directly assessing the client's

Inherent and control risk

Inherent risk and control risk differ from detection risk in which of the following ways?

Inherent risk and control risk exist independently of the audit

In a financial statement audit of a nonissuer, an auditor would consider a judgemental misstatement to be a misstatement that

Involves an estimate

Which of the following is not a primary characteristic associated with audit risk?

It is a risk that the auditor may fail to detect a client's deceptive practices which may result in a misstatement of the financial statements.

While performing audit fieldwork on a client, the auditor reviews the client's depreciation policies and schedules on a select group of fixed assets. After careful review of the estimated lives on these fixed assets, the auditor determines that the basis used to determine the length of the estimated useful lives for certain fixed assets is unreasonable and not supported by any internal or industry factors. Based on the above, the auditor would most likely consider this a :

Judgmental misstatement

The ultimate purpose of asserting control risk is to contribute to the audito'rs evaluation of the risk that

Material misstatements may exist in the financial statements

Risks of material misstatement may be greater from matters arising from:

Nonroutine related party transactions

The existence of audit risk is recognized by the statement in the auditors standard report that the auditor

Obtains reasonable assurance about whether the financial statements are free of material misstatement

In an audit of financial statements for which an auditor's assessment of risk is judgmental and may not be sufficiently precise to identify all risks of material misstatement, the auditor should take which of the following actions?

Perform substantive procedures for all relevant assertions related to each significant class of transactions

As the acceptable level of detection risk decreases, an auditor may

Postpone the planned timing of substantive tests from interim dates to the year-end

An audit team has concluded that inventory is highly susceptible to misappropriation and that a potential misstatement would be material to the financial statements. How should the audit team address the audit procedures to the increased risk?

Review the client's control procedures over the safeguarding of inventory, and perform a physical inventory count on the last day of the current year

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the

Risk that material misstatements exist in the financial statements

As the acceptable level of detection risk increases, an auditor may

Select a smaller sample size

Which of the following courses of action is the most appropriate if an auditor concludes that there is a high risk of material misstatement?

Select more effective substantive tests

As the acceptable level of detection risk decreases, the assurance directly provided from

Substantive tests should increase

Regardless of the assessed level of control risk, an auditor would perform some

Substantive tests to restrict detection risk for significant transaction classes

Which of the following is an example of an inherent risk that an auditor should consider?

Technological developments that may render inventory obsolete

Which of the following best identifies the effect of an increase in the risk of material misstatement on detection risk and the extent of substantive procedures?

The acceptable level of detection risk decreases, and the extent of substantive procedures increases

If control risk has increased in the current period as compared to the previous period, then

The acceptable level of detection risk will increase and more substantive testing will be required in the current period relative to the previous period

During the planning stage of an audit, the auditor initially assessed both inherent risk and control risk at a high level. Further testing of the client's controls led the auditor to reduce the assessment of control risk. Which of the following is most likely to occur as a result?

The auditor may reduce the amount of substantive procedures performed

Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit?

The entity enters into derivative transactions as hedges

Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements in an entity's financial statements?

The entity's industry is experiencing declining customer demand

Which of the following is an important consideration when deciding the nature of tests to use in a financial statement audit?

The procedures to be applied on a particular engagement are a matter of the auditor's professional judgement

Which of the following statements regarding the risk of material misstatement is correct?

The risk of material misstatement includes the auditors assessment of inherent risk as well as control risk

Which of the following is a definition of control risk?

The risk that a material misstatement will not be prevented or detected on a timely basis by the client's system of internal control

In an engagement to examine management's discussion and analysis (MD&A), which of the following best defines control risk?

The risk that material misstatements in the MD&A presentation will not be prevented in a timely manner

As a result of control testing, a CPA has decided to reduce control risk. What is the impact on substantive testing sample size if all other factors remain constant?

The sample size would be lower

In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following?

The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls

As the acceptable level of detection risk increases, an auditor may change the

Timing of substantive tests from year-end to an interim date

Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?

When the combined assessed level of inherent and control risk over the sale is high