QUIZ 2 AT

The risk that financial statements are likely to be misstated materially without regard to the effectiveness of internal control is which type of risk?

• Inherent risk

• Audit risk

• Client risk

• Control risk

Inherent risk is defined as the susceptibility of an account balance or class of transactions to error that could be material assuming that there were no related internal controls. Of the following conditions, which one does not increase inherent risk?

• The client has entered into numerous related party transactions during the year under audit.

• Internal control over shipping, billing and recording of sales revenue is weak.

• The client has lost a major customer accounting for approximately 30% of annual revenue.

• The board of directors approved a substantial bonus for the president and chief executive officer, and also approved an attractive stock option plan for themselves.

Which of the following descriptions best describes inherent risk?

• Auditors fail to discover a material misstatement in the course of their audit and do not modify their audit opinion.

• A company’s internal control fails to identify a material misstatement in a timely fashion.

• Auditing procedures fail to find a material misstatement.

• The possibility that a material misstatement will occur in any given account before considering internal control.

The risk that the audit will fail to uncover a material misstatement is eliminated

• If a client has strong internal controls.

• If a client follows generally accepted accounting principles (GAAP).

• When the auditor has complied with the generally accepted auditing standards (GAAS).

• Under no circumstances.

The probability that an auditor’s procedures leading to the conclusion that a material error does not exist in an account balance when, in fact, such error does exist if referred to as

• Prevention risk

• Inherent risk

• Control risk

• Detection risk

Which of the following characteristics most likely would likely would heighten an auditor’s concern about risk of intentional manipulation of financial statements?

• Turnover of senior accounting personnel is low.

• Insiders recently purchased additional shares of the entity’s stock.

• Management places substantial emphasis on meeting earnings projections.

• The rate of change in the entity’s industry is slow.

An audit plan is a

• Detailed plan if analytical procedures and all substantive tests to be performed in the course of the audit.

• Document that provides an overview of the company and a general plan for the audit work to be accomplished, timing of the work, and other matters of concern to the audit.

• Generic document that auditing firms have developed to lead the process of the audit through a systematic and logical process.

• Budget of the time that should be necessary to complete each phase of the audit procedures.

Which of the following statements is true with regard to the relationship among audit risk, audit evidence, and materiality?

• The lower the inherent risk and control risk, the lower the aggregate materiality threshold.

• Under conditions of high inherent risk and control risk, the auditor should place more emphasis on obtaining external evidence and should reduce reliance on internal evidence.

• Where inherent risk is high and control risk is low, the auditor may safely ignore inherent risk.

• Aggregate materiality thresholds should not change under conditions of changing risk levels.

The main purpose of risk assessment procedures is to

• Obtain an understanding of the entity and its environment, including its internal control, to assess the risks of material misstatement at the financial statement and assertion levels.

• Test of operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level.

• Detect material misstatements at the assertion level.

• All of the given choices are main purposes of risk assessment procedures.

Which statement is incorrect regarding the extent of further audit procedures?

• Extent includes the quantity of a specific audit procedure to be performed.

• The extent of an audit procedure is determined by the judgment of the auditor after considering the materiality, the assessed risk, and the degree of assurance the auditor plans to obtain.

• The auditor ordinarily decreases the extent of audit procedures as the risk of material misstatement increases.

• Increasing the extent of an audit procedure is effective only if the audit procedure itself is relevant to the specific risk.