Risk Assessment and Audit Planning
Exam Solutions
Course Introduction
Risk Assessment and Audit Planning delves into the foundational processes and methodologies used by auditors to identify, evaluate, and prioritize risks within an organization. The course covers the theoretical frameworks and practical tools for assessing internal and external risks that may impact financial reporting and organizational operations. Students learn how to design effective audit plans that respond to identified risks, allocate resources accordingly, and establish appropriate audit objectives and procedures. Emphasis is placed on understanding regulatory requirements, industry standards, and ethical considerations to ensure that audit activities provide valuable assurance and support sound decision-making.
Recommended Textbook
Auditing and Assurance Services A Systematic Approach 9th Edition by William F. Messier
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1528 Verified Questions
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Chapter 1: An Introduction to Assurance and Financial Statement Auditing
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Sample Questions
Q1) Auditing is a type of attest service.
A)True
B)False
Answer: True
Q2) Auditing is defined as a "systematic process of objectively obtaining and evaluating evidence regarding assertions..." What is meant by "systematic process"?
A) All audits involve obtaining the same evidence.
B) All audits involve evaluating evidence in the same manner.
C) There should be a well-planned approach for obtaining and evaluating evidence.
D) All assertions are equally important for all audits.
Answer: C
Q3) Independence standards are required for audits of public companies, but not for audits of private companies.
A)True
B)False
Answer: False
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Chapter 2: The Financial Statement Auditing Environment
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Sample Questions
Q1) The main difference between SAS and AU is
A) They are the same except that SAS are organized chronologically and the AU are organized by topical area.
B) SAS are issued by the ASB and AU are issued by the PCAOB.
C) SAS are issued by the PCAOB and AU are issued by the ASB.
D) SAS define minimum standards of performance for auditors while AU define financial accounting principles that must be followed according to GAAP.
Answer: A
Q2) Which of the following best describes the concept of risk assessment on which auditors can provide independent assurance?
A) The risk that financial statements are misstated because of fraud.
B) The risk that financial statements are misstated because of error or fraud.
C) Whether management has systems in place to evaluate and effectively manage the entity's business risks.
D) Developing client acceptance and continuance practices that minimize the likelihood of lawsuits against the auditor.
Answer: C
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Chapter 3: Audit Planning, Types of Audit Tests, and Materiality
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Sample Questions
Q1) To emphasize auditor independence from management, publicly traded corporations are required to
A) Appoint a partner of the CPA firm conducting the examination to the corporation's audit committee.
B) Establish a policy of discouraging social contact between employees of the corporation and the independent auditors.
C) Request that a representative of the independent auditor be on hand at the annual stockholders' meeting.
D) Have the independent auditor report to an audit committee of independent members of the board of directors.
Answer: D
Q2) The external auditor is required to make a number of important communications to the audit committee during or at the end of the audit engagement.
A)True
B)False
Answer: True
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Chapter 4: Risk Assessment
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Sample Questions
Q1) The auditor is most likely to presume that a high risk of a fraud exists if
A) The entity is a multinational company that does business in numerous foreign countries.
B) The entity does business with several related parties.
C) Inadequate segregation of duties places an employee in a position to perpetrate and conceal theft.
D) Inadequate employee training results in lengthy EDP exception reports each month.
Q2) You are the senior on an audit of Two Be Gone, a large public company. The company recently completed an acquisition of its fifth largest competitor. What risks might this present? How will you, the auditor, respond to these risks (i.e. what actions should you take)?
Q3) Which of the following is not a misstatement of the financial statements?
A) The entity uses different inventory accounting methods for internal and external reporting.
B) A departure from GAAP.
C) The footnote for pensions is omitted.
D) A clerk incorrectly based the allowance for doubtful accounts on 31% of sales as opposed to 13% of sales as determined by the controller.
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Chapter 5: Evidence and Documentation
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Sample Questions
Q1) An example of audit evidence with a medium level of reliability is
A) Scanning.
B) Recalculation.
C) Observation.
D) All of these.
Q2) Procedures specifically outlined in an audit program are designed primarily to A) Assess risk for planning purposes.
B) Detect all errors or fraudulent activities.
C) Test internal control systems.
D) Gather evidence about management's assertions.
Q3) Analytical procedures used in planning an audit should focus on identifying A) Material weaknesses in internal control.
B) The predictability of financial data from individual transactions.
C) The various assertions that are embodied in the financial statements.
D) Areas that may represent specific risks relevant to the audit.
Q4) Of the following, the most reliable type of evidence typically is:
A) Confirmation.
B) Inspection of records and documents.
C) Reperformance.
D) Observation.
7
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Chapter 6: Internal Control in a Financial Statement Audit
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Sample Questions
Q1) When documenting an entity's internal control, the independent auditor sometimes uses a systems flowchart, which can best be described as a
A) Pictorial presentation of the flow of instructions in an entity's internal computer system.
B) Diagram which clearly indicates an organization's internal reporting structure.
C) Graphic illustration of the flow of operations which is used to replace the auditor's internal control questionnaire.
D) Symbolic representation of a system or series of sequential processes.
Q2) For certain controls, such as segregation of duties, documentary evidence may not exist. An auditor would most likely test the procedures by
A) Reperformance and corroboration.
B) Observation and inquiry.
C) Inspection and vouching.
D) Confirmation and recomputation.
Q3) The concept of internal control includes IT systems and manual systems.
A)True
B)False
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Chapter 7: Auditing Internal Control Over Financial Reporting
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Sample Questions
Q1) Management documentation should include all of the following except:
A) Documentation regarding the auditor's evaluation of internal controls.
B) Documentation regarding management's testing and evaluation of the controls.
C) Documentation regarding the safeguarding of assets.
D) Documentation on the controls designed in all five components of internal control.
Q2) Which of the following is true of generalized audit software packages?
A) They can be used only in auditing online computer systems.
B) They can be used on any computer without modification.
C) They each have their own characteristics that the auditor must carefully consider before using in a given audit situation.
D) They enable the auditor to perform all manual test procedures less expensively.
Q3) Which of the following is not a primary objective of internal control as established by COSO?
A) Efficiency and effectiveness of operations.
B) Effective purchasing systems.
C) Compliance with laws and regulations.
D) Reliable financial reporting.
Q4) Discuss entity-level controls and provide examples of these types of controls.
Page 9
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Chapter 8: Audit Sampling: An Overview and Application to
Tests of Controls
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Sample Questions
Q1) An advantage of using statistical over nonstatistical sampling methods in tests of controls is that the statistical methods
A) Afford greater assurance than a nonstatistical sample of equal size.
B) Provide an objective basis for quantitatively evaluating sample risks.
C) Can more easily convert the sample into a dual-purpose test useful for substantive testing.
D) Eliminate the need to use judgment in determining appropriate sample sizes.
Q2) Why must an auditor use sampling? What tradeoffs occur when an auditor uses sampling?
Q3) In attributes sampling, population size has little or no effect on sample size once the population exceeds approximately
A) 500.
B) 5,000.
C) 100,000.
D) 1,000,000.
Q4) Define Type I and Type II errors.
Q5) Confidence level and sampling risk are related to sample size.
A)True
B)False
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Chapter 9: Audit Sampling: An Application to Substantive
Tests of Account Balances
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Sample Questions
Q1) If the upper limit on misstatements exceeds tolerable misstatement, the auditor is least likely to
A) Increase sample size.
B) Conduct other substantive procedures.
C) Adjust the account balance.
D) Increase the risk of incorrect rejection.
Q2) Whenever a statistical method is used, a decision rule determines whether the population is acceptable. The decision rule for monetary-unit sampling is "Accept the conclusion that the book value is not misstated by a material amount if ________________________."
Q3) Describe two advantages and two disadvantages of monetary-unit sampling (MUS).
Q4) While performing a substantive test of details during an audit, the auditor determined that the sample results supported the conclusion that the recorded account balance was materially misstated. It was, in fact, not materially misstated. Such a situation illustrates the risk of
A) Incorrect rejection.
B) Incorrect acceptance.
C) Assessing control risk too high.
D) Assessing control risk too low.
Page 11
Q5) What is one advantage and one disadvantage of classical variables sampling?
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Chapter 10: Auditing the Revenue Process
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Sample Questions
Q1) Audit documents often include an aged trial balance of accounts receivable as of the balance sheet date. This aging is used by the auditor to
A) Evaluate internal control over credit sales.
B) Test the accuracy of recorded credit sales.
C) Evaluate the allowance for doubtful accounts.
D) Verify the existence of the recorded receivables.
Q2) Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables'
A) Valuation.
B) Classification.
C) Existence.
D) Completeness.
Q3) An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about
A) Valuation and allocation.
B) Completeness.
C) Existence.
D) Rights and obligations.
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Chapter 11: Auditing the Purchasing Process
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Sample Questions
Q1) The occurrence assertion for accounts payable includes
A) Determining whether all accounts payable are recorded.
B) Determining whether all accounts payable actually are liabilities.
C) Determining whether all accounts payable are recorded in the proper period.
D) Determining whether all accounts payable are properly classified in the financial statements.
Q2) To determine whether accounts payable are complete, an auditor performs a test to verify that all merchandise received is recorded. The population of documents for this test consists of all
A) Payment vouchers.
B) Receiving reports.
C) Purchase requisitions.
D) Vendors' invoices.
Q3) The auditor is most likely to verify accrued commissions payable in conjunction with the
A) Sales cutoff review.
B) Verification of employees.
C) Review of post balance sheet date disbursements.
D) Examination of trade accounts payable.
Q4) Describe three categories of expenses outlined in FASB Concept Statement No. 5.
Page 13
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Chapter 12: Auditing the Human Resource Management Process
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Sample Questions
Q1) A substantive test of transactions to test the completeness assertion includes
A) Tracing a sample of time sheets to the payroll register.
B) Testing a sample of payroll checks for the presence of an authorized time sheet.
C) Testing postings to the payroll register for a sample of payroll checks.
D) Recomputing the accuracy of a sample of payroll checks.
Q2) When examining payroll transactions, an auditor is primarily concerned with the possibility of
A) Underpayments and properly authorized payments.
B) Posting of gross payroll amounts to incorrect salary expense accounts.
C) Misfootings of employee time records.
D) Excess withholding of amounts required to be withheld.
Q3) Which of the following is required of an auditor who is testing the fair value of options in share-based compensation?
A) Using a specialist.
B) Testing the inputs used in the valuation model.
C) Becoming an expert in option-pricing.
D) Using the work of the internal audit function.
Q4) Explain how the human resource management process can affect the financial statements.
Page 14
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Chapter 13: Auditing the Inventory Management Process
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Sample Questions
Q1) In the audit of inventory, the entity is responsible for actually making and recording the count of physical inventory; the auditor's responsibility is to evaluate and observe the entity's procedures and draw conclusions about the adequacy of the physical inventory.
A)True
B)False
Q2) An auditor generally tests physical security controls over inventory by
A) Test counts and cutoff procedures.
B) Examination and reconciliation.
C) Inspection and recomputation.
D) Inquiry and observation.
Q3) Observing an entity's inventory held on consignment by others tests the assertion of A) Existence.
B) Completeness.
C) Valuation.
D) Rights and obligations.
Q4) Below is information relating to the inventory management of Quick Sell. Using analytical procedures, identify any concerns you have about misstatements in the financial statements.
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Chapter 14: Auditing the Financing Investing Process:
Prepaid Expenses Intangible Assets and Property Plant and Equipment
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Sample Questions
Q1) The auditor is most likely to seek information from the plant manager with respect to the
A) Adequacy of the provision for uncollectible accounts.
B) Appropriateness of physical inventory observation procedures.
C) Existence of obsolete machinery.
D) Deferral or procurement of certain necessary insurance coverage.
Q2) Reviewing capital budgets and comparing the amounts spent with amounts budgeted is an example of a substantive analytical procedure for auditing prepaid accounts.
A)True
B)False
Q3) How do accounting standards regarding accounting for the impairment or disposal of long-lived assets affect the audit of property, plant, and equipment?
Q4) The cutoff assertion for prepaid insurance
A) Is never tested because amounts always are immaterial.
B) Is best tested as part of the testing of property and equipment purchasing.
C) Is best tested exclusively by sending confirmations to vendors.
D) Is best tested by recomputing the unexpired portion of insurance policies in effect.
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Chapter 15: Auditing the Financing Investing Process:
Long-Term Liabilities Stockholders Equity and Income
Statement Accounts
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Sample Questions
Q1) In the audit of a medium-sized manufacturing concern, which one of the following areas can be expected to require the least amount of audit time?
A) Retained earnings.
B) Revenue.
C) Assets.
D) Liabilities.
Q2) Overall analysis of income statement accounts may bring to light errors, omissions, and inconsistencies not disclosed in the overall analysis of balance sheet accounts. The income statement analysis can best be accomplished by comparing monthly
A) Income statement ratios to balance sheet ratios.
B) Revenue and expense account balances to the monthly reported net income.
C) Income statement ratios to published industry averages.
D) Revenue and expense account totals to the corresponding figures of the preceding years.
Q3) There are typically only a couple of disclosure items that need to be considered for stockholders' equity.
A)True
B)False
Page 17
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Chapter 16: Auditing the Financinginvesting Process: Cash and Investments
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Sample Questions
Q1) When there is a large number of negotiable securities in multiple locations, careful planning of the physical inspection and count of the securities by the auditor is necessary to guard against
A) Unauthorized negotiation of the securities before they are counted.
B) Unrecorded sales of securities after they are counted.
C) Substitution of securities already counted at one location for other securities that should be on hand at a different location but are not.
D) Substitution of authentic securities with counterfeit securities.
Q2) In a manufacturing company, which one of the following audit procedures would give the least assurance for the existence of the general ledger balance of investment in stocks and bonds at the audit date?
A) Confirmation from the broker.
B) Inspection and count of stocks and bonds.
C) Vouching all changes during the year to brokers' advices and statements.
D) Examination of canceled checks issued in payment of securities purchased.
Q3) Explain the importance of the bank reconciliation to the audit and list some of the items found on the reconciliation.
Q4) Explain how cash plays a role in all business processes.
Page 18
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Chapter 17: Completing the Audit Engagement
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Sample Questions
Q1) Who generally signs the legal letter?
A) The board of directors.
B) The audit partner.
C) The CEO of the entity being audited.
D) The entity's attorneys.
Q2) As part of an audit, a CPA often requests a representation letter from the entity. Which one of the following is not a valid purpose of such a letter?
A) To provide audit evidence.
B) To emphasize to the entity their responsibility for the fairness of the financial statements.
C) To satisfy himself or herself that a certain account balance is fairly stated when certain customary auditing procedures are not performed.
D) To provide possible protection to the CPA against a charge of knowledge in cases where fraud is subsequently discovered to have existed in the accounts.
Q3) A legal letter will include and evaluate all contingent liabilities of the company.
A)True
B)False
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Chapter 18: Reports on Audited Financial Statements
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Sample Questions
Q1) The choice of which audit report to issue depends on the condition and the materiality of any departure.
A)True
B)False
Q2) In an engagement to express an opinion on one or more specified elements, accounts, or items of a financial statement, the auditor can generally audit only those specified elements and not the entire set of financial statements. However, the auditor is required to audit the entire set of financial statements if the elements specified include
A) Net Income.
B) Stockholders' Equity.
C) Net Income and Stockholders' Equity.
D) Assets.
Q3) Which of the following parties is responsible for the fairness of the representations made in financial statements?
A) Entity's management.
B) Independent auditor.
C) Audit committee.
D) AICPA.
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Chapter 19: Professional Conduct, Independence, and Quality Control
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Sample Questions
Q1) When auditing a public company, which of the following impairs an auditor's independence?
A) Offering audit services as well as preparing the tax return for the same client.
B) The auditor's spouse works in the assembly line of an audit client.
C) Lack of fee disclosure in the client's annual report.
D) The auditor has been a partner on the engagement for ten years.
Q2) If a CPA owns an insurance policy issued by an attest client, independence would be considered impaired, even if the policy was purchased under the insurance company's normal terms and procedures and does not offer an investment option.
A)True
B)False
Q3) The quality control standards are concerned primarily with
A) Actions of individual auditors.
B) A firm's monitoring of its practice.
C) Disciplinary actions against individual auditors.
D) Preventing legal action.
Q4) When can a CPA disclose confidential information without the client's consent?
Q5) Identify the primary purposes of Rules 201-203 of the Rules of Conduct.
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Chapter 20: Legal Liability
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Sample Questions
Q1) An auditor can be sued by a third party under statutory law for willful violation of federal statutes.
A)True
B)False
Q2) To be successful in a civil action under Section 11 of the Securities Act of 1933 concerning liability for a misleading registration statement, the plaintiff must prove
A) The plaintiff's reliance on the registration statement and the defendant's intent to deceive.
B) Neither the plaintiff's reliance on the registration statement nor the defendant's intent to deceive.
C) The plaintiff's reliance on the registration statement but not the defendant's intent to deceive.
D) The defendant's intent to deceive but not the plaintiff's reliance on the registration statement.
Q3) To recover against an auditor in a negligence case, the client must prove that the client sustained an actual loss or damage.
A)True
B)False
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Chapter 21: Assurance, Attestation, and Internal Auditing Services
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Sample Questions
Q1) When third party use of prospective financial statements is expected, an accountant may not accept an engagement to
A) Perform a review.
B) Perform a compilation.
C) Perform an examination.
D) Apply agreed-upon procedures.
Q2) For an auditor to examine management's assertions about the effectiveness of internal control in an attestation engagement, three conditions are necessary. Briefly explain them.
Q3) During a review of the financial statements of a nonpublic entity, an accountant becomes aware of inadequate disclosure that is material to the financial statements. If management refuses to correct the financial statement presentations, the accountant should
A) Issue an adverse opinion.
B) Issue an "except for" qualified opinion.
C) Disclose this departure from generally accepted accounting principles in a separate paragraph of the report.
D) Express only limited assurance on the financial statement presentations.
Q4) How has the advancement in technology led to the creation of the Trust Services?
Page 23
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