Question 1

How much control does the auditor have over inherent risk?

Accepted Answer

A)   The auditor adjusts the controls that are considered (high level of control) .
B)   The auditor considers inherent risk for the business as a whole (some control) .
C)   The auditor assesses the factors that make up inherent risk (no control) .
D)   The auditor calculates inherent risk values as a residual (no control) .E) C) and D)
F) All of the above

Question 2

A PA recently finished the audit of a family-owned business. Now she is working on a large client with about 50 times the assets and 30 times total revenue. For the larger client, the PA will likely have

Accepted Answer

A)   no changes to the audit risk model.
B)   higher control risk.
C)   higher audit risk.
D)   lower audit risk.E) All of the above
F) B) and C)

Question 3

If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is considered to be

Accepted Answer

A)   significant.
B)   insignificant.
C)   material.
D)   relevant.E) C) and D)
F) A) and D)

Question 4

When inherent risk is assessed as higher (i.e. more material errors are likely to exist)  and control risk is assessed the same from one year to the next, what is the likely effect on detection risk?

Accepted Answer

A)   Detection risk will increase.
B)   Detection risk will decrease.
C)   Detection risk will stay the same.
D)   Detection risk will need less documentation.E) None of the above
F) All of the above

Question 5

As the effectiveness of internal control increases, what happens to control risk?

Accepted Answer

A)   It stays the same.
B)   It increases.
C)   It changes based on the audit procedures conducted.
D)   It decreases.E) A) and B)
F) A) and C)

Question 6

With respect to clients, business risk increases when conditions, events, circumstances or inactions

Accepted Answer

A)   adversely affect the entity's ability to achieve its objectives.
B)   cause employees to not do their job properly.
C)   result in the company continuing profitable operations.
D)   result in an assessment of poor internal controls.E) A) and C)
F) B) and C)

Question 7

Discuss three factors that affect client business risk and therefore audit risk.

Accepted Answer

Business risk and audit risk are affecte...

Question 8

The materiality for Holloy Company is $75 000. There are carryforward misstatements of $25 000 from the previous year. Current year anticipated misstatements are $15 000, with anticipated corrections of $10 000. What is the performance materiality?

Accepted Answer

A)   $45 000
B)   $50 000
C)   $55 000
D)   $90 000E) A) and C)
F) B) and C)

Question 9

Senior management of Mega Corp. is entitled to receive large bonuses if they achieve earnings targets. What is the effect of this on the risks associated with recording of revenue?

Accepted Answer

A)   It increases inherent risks associated with revenue cutoff and existence assertions.
B)   It increases inherent risks associated with revenue cutoff and completeness assertions.
C)   It increases control risks associated with revenue cutoff and existence assertions.
D)   It increases control risks associated with revenue cutoff and completeness assertions.E) All of the above
F) None of the above

Question 10

The first step in applying materiality is

Accepted Answer

A)   estimating the misstatement in a segment for each functional cycle.
B)   setting a judgment about materiality for the financial statements as a whole.
C)   estimating the combined effects of errors.
D)   comparing the error estimate with the materiality levels.E) A) and B)
F) B) and D)

Question 11

Which of the following types of misstatements has the highest level of certainty?

Accepted Answer

A)   identified misstatements
B)   likely misstatements
C)   likely aggregate misstatements
D)   further possible misstatementsE) A) and C)
F) A) and B)

Question 12

When the auditor has the same level of willingness to risk that material errors will exist after the audit is finished for all five cycles,

Accepted Answer

A)   the same amount of evidence will be gathered for each cycle.
B)   a different extent of evidence is needed for various cycles.
C)   he/she has not followed generally accepted auditing standards.
D)   the level for each cycle must be no more than 2% so that the entire audit does not exceed 10%.E) A) and C)
F) B) and D)

Question 13

If the auditor sets a low dollar amount as materiality,

Accepted Answer

A)   more evidence is required than for a high amount.
B)   less evidence is required than for a high amount.
C)   the same amount of evidence is required as for a high dollar amount.
D)   it has no effect on the amount of evidence required.E) B) and D)
F) B) and C)

Question 14

If audit risk is increased, what happens to detection risk?

Accepted Answer

A)   It stays the same.
B)   It increases.
C)   It changes based upon the audit procedures conducted.
D)   It decreases.E) A) and D)
F) A) and C) D

Question 15

Which of the following would be a signal of possible problems with management integrity?

Accepted Answer

A)   reliance on debt rather than equity for financing permanent assets
B)   rotation of holidays in the supervisory area over a period of months
C)   rapidly declining profits or increasing losses over a period of years
D)   frequent disagreements with regulators and the Canada Revenue AgencyE) C) and D)
F) A) and B)

Question 16

All other factors held constant, if the auditor decreases audit risk then

Accepted Answer

A)   there will be less documentation in the audit file.
B)   total audit evidence and audit costs will increase.
C)   it will also be necessary to decrease either control risk or inherent risk.
D)   less supervision of the audit team will be required.E) All of the above
F) B) and D)

Question 17

Big Box Distribution Company has an in-house information systems department of 50 people. The company generally does its own programming, although some software was acquired as a software package. A software package was purchased for customer relationship management, which will be modified by the programming staff.
Procedures for implementing programs vary by department. All major changes are approved by the Management Information Systems steering committee. The committee is also given a list of the maintenance changes that are planned in the coming year. Some departments request that the data processing department handle testing, while other users are rather picky and want to do their own testing. Requirements are generally prepared in writing, although small maintenance changes may be handled verbally.
Required:
Assess inherent risk associated with program changes at Big Box.

Accepted Answer

Inherent risks for programming errors are high.This means that there could be incorrect or unauthorized program changes, particularly for those departments where the information systems department handles all of the testing.
Reasoning:
The following behaviours increase the risks of unauthorized or incorrect program changes:
•Maintenance changes do not require independent approval (this means that anyone can initiate a program change).
•Maintenance changes may be made without a written request or may not be documented (same as above, it also means that program changes may be made without being documented or tested).
•Customized systems are in use; customized systems are used by only one business (i.e., Big Box)and tend to have less testing and documentation than packaged systems, meaning that there is a greater likelihood for program errors.

Question 18

A) Explain how auditors use the audit risk model when planning an audit.
B) Describe the audit risk model and each of its components.

Accepted Answer

A)The audit risk model is used primarily for planning purposes in deciding how much evidence to accumulate in each cycle.The auditor decides an acceptable level of audit risk, assesses inherent risk and control risk, and then uses the relationship depicted in the following model to determine an appropriate level for detection risk, so as not to provide an unqualified opinion when material errors do in fact exist in the financial statements:
PDR = $\frac { \mathrm { AR } } { \mathrm { IR } \times \mathrm { CR } }$ 
B)The planning form of the audit risk model is stated as follows:
PDR = $\frac { \mathrm { AR } } { \mathrm { IR } \times \mathrm { CR } }$ 
where: PDR = planned detection risk
AR = audit risk
IR = inherent risk
CR = control risk
Detection risk is a measure of the risk that audit evidence for an account will fail to detect misstatements exceeding a tolerable amount, should such misstatements exist.Detection risk determines the amount of substantive evidence that the auditor plans to accumulate.
Audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued.It is influenced primarily by the degree to which external users will rely on the statements, the likelihood that a client will have financial difficulties after the audit report is issued, and the auditor's evaluation of management's integrity.
Inherent risk is a measure of the auditor's assessment of the likelihood that there are material misstatements in an account before considering the effectiveness of internal control.
Control risk is a measure of the auditor's assessment of the likelihood that misstatements exceeding a tolerable amount in an account will not be prevented or detected by the client's internal controls.

Question 19

The purpose of allocating planning materiality to balance sheet accounts is to

Accepted Answer

A)   assess the appropriate evidence to accumulate for each account on the balance sheet.
B)   assess the appropriate evidence to accumulate for each account on both the balance sheet and income statement.
C)   reduce the amount of procedures done in the course of the audit.
D)   increase the possibility that fraud or illegal activities would be detected by audit procedures.E) B) and C)
F) C) and D)

Question 20

Since materiality is relative, it is necessary to have benchmarks for establishing whether misstatements are material. Normally, the most important base for deciding what is material, because it is regarded as a critical item of current period information for users, is

Accepted Answer

A)   total assets.
B)   net income.
C)   net working capital.
D)   net income before taxes.E) All of the above
F) B) and D)

Exam 7: Materiality and Risk

How much control does the auditor have over inherent risk?

Correct Answer
verified

A PA recently finished the audit of a family-owned business. Now she is working on a large client with about 50 times the assets and 30 times total revenue. For the larger client, the PA will likely have

Correct Answer
verified

If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is considered to be

Correct Answer
verified

When inherent risk is assessed as higher (i.e. more material errors are likely to exist) and control risk is assessed the same from one year to the next, what is the likely effect on detection risk?

Correct Answer
verified

As the effectiveness of internal control increases, what happens to control risk?

Correct Answer
verified

With respect to clients, business risk increases when conditions, events, circumstances or inactions

Correct Answer
verified

Discuss three factors that affect client business risk and therefore audit risk.

Correct Answer
verified
Business risk and audit risk are affecte...
View Answer

The materiality for Holloy Company is $75 000. There are carryforward misstatements of $25 000 from the previous year. Current year anticipated misstatements are $15 000, with anticipated corrections of $10 000. What is the performance materiality?

Correct Answer
verified

Senior management of Mega Corp. is entitled to receive large bonuses if they achieve earnings targets. What is the effect of this on the risks associated with recording of revenue?

Correct Answer
verified

The first step in applying materiality is

Correct Answer
verified

Which of the following types of misstatements has the highest level of certainty?

Correct Answer
verified

When the auditor has the same level of willingness to risk that material errors will exist after the audit is finished for all five cycles,

Correct Answer
verified

If the auditor sets a low dollar amount as materiality,

Correct Answer
verified

If audit risk is increased, what happens to detection risk?

Correct Answer
verified
D

Which of the following would be a signal of possible problems with management integrity?

Correct Answer
verified

All other factors held constant, if the auditor decreases audit risk then

Correct Answer
verified

A) Explain how auditors use the audit risk model when planning an audit. B) Describe the audit risk model and each of its components.

The purpose of allocating planning materiality to balance sheet accounts is to

Correct Answer
verified

Since materiality is relative, it is necessary to have benchmarks for establishing whether misstatements are material. Normally, the most important base for deciding what is material, because it is regarded as a critical item of current period information for users, is

Correct Answer
verified

Exam 7: Materiality and Risk

How much control does the auditor have over inherent risk?

Correct AnswerverifiedShow Answer

A PA recently finished the audit of a family-owned business. Now she is working on a large client with about 50 times the assets and 30 times total revenue. For the larger client, the PA will likely have

Correct AnswerverifiedShow Answer

If it is probable that the judgment of a reasonable person would have been changed or influenced by the omission or misstatement of information, then that information is considered to be

Correct AnswerverifiedShow Answer

When inherent risk is assessed as higher (i.e. more material errors are likely to exist) and control risk is assessed the same from one year to the next, what is the likely effect on detection risk?

Correct AnswerverifiedShow Answer

As the effectiveness of internal control increases, what happens to control risk?

Correct AnswerverifiedShow Answer

With respect to clients, business risk increases when conditions, events, circumstances or inactions

Correct AnswerverifiedShow Answer

Discuss three factors that affect client business risk and therefore audit risk.

Correct AnswerverifiedBusiness risk and audit risk are affecte...View AnswerShow Answer

The materiality for Holloy Company is $75 000. There are carryforward misstatements of $25 000 from the previous year. Current year anticipated misstatements are $15 000, with anticipated corrections of $10 000. What is the performance materiality?

Correct AnswerverifiedShow Answer

Senior management of Mega Corp. is entitled to receive large bonuses if they achieve earnings targets. What is the effect of this on the risks associated with recording of revenue?

Correct AnswerverifiedShow Answer

The first step in applying materiality is

Correct AnswerverifiedShow Answer

Which of the following types of misstatements has the highest level of certainty?

Correct AnswerverifiedShow Answer

When the auditor has the same level of willingness to risk that material errors will exist after the audit is finished for all five cycles,

Correct AnswerverifiedShow Answer

If the auditor sets a low dollar amount as materiality,

Correct AnswerverifiedShow Answer

If audit risk is increased, what happens to detection risk?

Correct AnswerverifiedD

Which of the following would be a signal of possible problems with management integrity?

Correct AnswerverifiedShow Answer

All other factors held constant, if the auditor decreases audit risk then

Correct AnswerverifiedShow Answer

A) Explain how auditors use the audit risk model when planning an audit. B) Describe the audit risk model and each of its components.

The purpose of allocating planning materiality to balance sheet accounts is to

Correct AnswerverifiedShow Answer

Since materiality is relative, it is necessary to have benchmarks for establishing whether misstatements are material. Normally, the most important base for deciding what is material, because it is regarded as a critical item of current period information for users, is

Correct AnswerverifiedShow Answer

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Business risk and audit risk are affecte...
View Answer

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D

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