WorksheetsB8AF108_AUDIT RISK AND ANALYTICAL PROCEDURES
Total questions: 8
Worksheet time: 5mins
You have received the latest management accounts from your client,
Esperence Co, to help with your risk assessment for the forthcoming
audit. The management accounts show actual results for the year to
date, January to October inclusive. In October, Esperence Co received
a claim from a customer as a result of a defective product.
Which of the following is an example of an audit risk for
Esperence Co?
The client is being sued by a customer for a defective
product and if the claim is successful, the compensation
awarded is likely to be significant
The client is being sued by a customer for a defective
product. The publicity of the case could damage the
company’s reputation
The client will have to spend a significant amount of money
on improving its quality control procedures to avoid the same
defects occurring again
Provisions may be understated if the probable payment
resulting from the court case is not recognised as a liability in
the financial statements
You have received the latest management accounts from your client,
Esperence Co, to help with your risk assessment for the forthcoming
audit. The management accounts show actual results for the year to
date, January to October inclusive. In October, Esperence Co received
a claim from a customer as a result of a defective product.
Which of the following is the correct formula for calculating
the payables payment period using the management
accounts of Esperence Co?
Payables/Cost of sales × 304
Payables/Cost of sales × 365
Payables/Revenue × 304
Payables/Revenue × 365
Which of the following is not an analytical procedure?
Calculation of gross profit margin and comparison with prior
year
Recalculation of a depreciation charge
Comparison of revenue month by month
Comparison of expenditure for current year with prior year
Which of the following is not a ratio?
Gross profit margin
Acid test
Inventory turnover
Revenue growth
You are the audit manager responsible for planning the audit of
Fremantle Co. The draft financial statements show profit before tax of
$3m and total assets of $50m. You have held a planning meeting with
the client and have performed preliminary analytical procedures on the
draft financial statements. You are currently assessing preliminary
materiality for the audit and performing further risk assessment
procedures.
Which of the following statements is FALSE in relation to
materiality?
Materiality can be assessed by size or nature
A balance which is omitted from the financial statements
cannot be material
Materiality is a matter of professional judgment for the
auditor
There is an inverse relationship between risk and materiality.
If audit risk is high, the materiality level set by the audit will
be lower
Which of the following procedures are NOT required to be
performed in accordance with ISA 315 (Revised) Identifying
and Assessing the Risks of Material Misstatement Through
Understanding the Entity and its Environment to identify
risks of material misstatements?
Inspection
Observation
External confirmation
Enquiry
Performance materiality should be used by the auditor when
performing substantive testing during the audit. Which of the
following best describes performance materiality?
The maximum amount of misstatement the auditor is willing
to accept
The amount at which the auditor deems the misstatement to
be trivial
An amount which could influence the economic decisions of
the users taken on the basis of the financial statements
An amount set below materiality for the financial statements
as a whole to reduce, to an acceptably low level, the risk that
misstatements could be material in aggregate
Professional scepticism must be applied by auditors during
the audit.
Which of the following is NOT an application of
professional scepticism?
A critical evaluation of the evidence
An open and questioning mind
The auditor should not believe anything the client tells them
The auditor must be alert to fraud and error
