AUDITING RISK AND MATERIALITY

In planning the audit engagement, the auditor should consider each of the following EXCEPT

a. matters relating to the entity’s business and the industries in which it operates
b. the entity’s accounting policies and procedures
c. anticipated levels of control risk and materiality
d. the kind of opinion that is likely to be expressed

d. the kind of opinion that is likely to be expressed

Prior to the beginning the field work on a new audit engagement in which a CPA does not possess expertise in the industry in which the client operates, the CPA should

a. reduce audit risk by lowering the preliminary levels of materiality
b. design special substantive tests to compensate for the lack of industry expertise
c. engage financial experts familiar with the nature of the industry
d. obtain a knowledge of matters that relate to the nature of the entity’s business

d. obtain a knowledge of matters that relate to the nature of the entity’s business

for initial engagements, PSA 510 does not require the auditor to obtain evidence

a. that the opening balances do not contain material misstatements that materially affect the current period’s financial statements
b. that the prior period’s ending balances have been correctly brought forward tot the current period or, when appropriate, have been restated
c. that appropriate accounting policies are consistently applied or changes in accounting policies have been properly accounted for and adequately disclosed
d. that the prior period financial statements were audited by in independent CPA

d. that the prior period financial statements were audited by in independent CPA

in planning the audit, the auditor should assess materiality at two levels

a. the preliminary level and the final level
b. the company level and the divisional level
c. the account balance level and the detailed item level
d. the financial statement level and the account balance level

d. the financial statement level and the account balance level

When comparing level of materiality used for planning purposes and the level of materiality used for evaluating evidence, one would most likely expect

a. the level of materiality to be always similar
b. the level of materiality for planning purposes to be smaller
c. the level of materiality for planning purposes to be higher
d. the level of materiality for planning purposes to be based on total assets while the level of materiality for evaluating purposes to be based on net income

b. the level of materiality for planning purposes to be smaller

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

a. prevention risk
b. inherent risk
c. control risk
d. detection risk

d. detection risk

according to auditing standards, the auditor uses the assessed level of control risk together with the assessed level of inherent risk to determine the acceptable level of detection risk for financial statement assertions. As the acceptable level of detection risk decreases the auditor may do one or more of the following except change the

a. nature of substantive tests to more effective procedures
b. timing of substantive tests, such as performing them at year end rather than at an interim date
c. extent of substantive tests, such as using larger sample size
d. assurance provided by substantive tests to a lower level

d. assurance provided by substantive tests to a lower level

as the acceptable level of detection risk decreases, an auditor may change the

a. timing of substantive tests by performing them at an interim date rather than at year end
b. nature of substantive tests from a less effective to a more effective procedure
c. timing of tests of controls by performing them at several dates rather than at one time
d. assessed level of inherent risk to a higher level

b. nature of substantive tests from a less effective to a more effective procedure

Which of the following is most likely to occur at the beginning of an initial audit engagement?

a. prepare a rough draft of the financial statements and of the auditor’s report
b. study and evaluate the system of internal administrative control
c. determine the client’s reason for an audit
d. consult with and review the work of the predecessor audit prior to discussing the engagement with the client management

c. determine the client’s reason for an audit

Which of the following factors most likely would influence an auditor’s determination of the auditability of the entity’s financial statements

a. the complexity of the accounting system
b. the existence of related party transactions
c. the adequacy of the accounting records
d. the operating effectiveness of control procedures

d. the operating effectiveness of control procedures

When the auditor of a parent entity is also the auditor of its subsidiary branch or division which of the following factors would least likely influence the auditor’s decision to send separate letter to a component of a parent entity?

a. geographical location of the component
b. legal requirements
c. degree of ownership by parent
d. degree of independence of component’s management

a. geographical location of the component

A CPA firm’s quality control procedures pertaining tot he acceptance of a prospective audit client would most likely include

a. inquiry of management as to whether disagreements between the predecessor auditor and the prospective client where resolved satisfactorily
b. consideration of whether sufficient competent evidential matter may be obtained to afford a reasonable basis for an opinion
c. inquiry of third parties, such as the prospective client’s bankers and attorneys, about information regarding the prospective client and its management
d. consideration of whether the internal control structure is sufficiently effective to permit a reduction in the required substantive tests

c. inquiry of third parties, such as the prospective client’s bankers and attorneys, about information regarding the prospective client and its management

Most auditors assess inherent risk as high for related parties and related party transactions because

a. of the unique classification of related party transaction required on the balance sheet
b. of the lack of independence between the parties
c. of the unique classification of related party transactions required on the income statement
d. it is required by generally accepted accounting principles

a. of the unique classification of related party transaction required on the balance sheet

Which of the following is not true

a. inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related tot he amount of audit evidence required
b. inherent risk is directly related to evidence whereas detection risk is inversely related tot he amount of audit evidence required
c. inherent risk is the susceptibility of the financial statements to material error, assuming no internal controls
d. inherent risk and control risk are assessed by the auditor and function independently of the financial statement audit

a. inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related tot he amount of audit evidence required

Which of the following statements is not true about the auditors assessment of inherent risk, when planning a financial statement audit?

a. in developing the overall audit plan, the auditor should assess inherent risk at the financial statement level
b. in developing an audit program, the auditor should assess inherent risk, at the account balance or transaction class level
c. the auditor can make a separate or combined assessment of inherent and control risk
d. the auditor’s assessment of inherent risk is influenced by the condition of the client’s accounting and internal control systems

d. the auditor’s assessment of inherent risk is influenced by the condition of the client’s accounting and internal control systems

What is the primary means of dealing with risk in planning decisions related to audit evidence?

a. selection of more effective tests of details of balances
b. application of the audit risk model
c. establishing a lower preliminary judgement about materiality
d. allocating materiality judgement to segments

b. application of the audit risk model

The risk of material misstatement is a function of

a. inherent and control risk
b. inherent and detection risk
c. detection and control risk
d. inherent, control and detection risk

a. inherent and control risk

which is not correct about materiality?

a. the concept of materiality recognizes that some matters are important for fair presentation of financial statements in conformity with the applicable financial reporting framework, while other matters are not important
b. an auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements
c. materiality judgements are made in light of surrounding circumstances and necessarily involve both quantitative and qualitative judgements
d. an auditor’s consideration of materiality is influenced by the auditor’s perception of the needs of a reasonable person who will rely on the financial statements

b. an auditor considers materiality for planning purposes in terms of the largest aggregate level of misstatements that could be material to any one of the financial statements

In developing the preliminary level of materiality in an audit, the auditor will

a. look to audit standards for specific materiality guidelines
b. increase the level of materiality if fraud is suspected
c. rely primarily on professional judgement to determine the materiality level
d. use the same materiality level as that used for different clients in the same industry

c. rely primarily on professional judgement to determine the materiality level

In making a preliminary judgement about materiality, the auditor initially determines the aggregate overall level of materiality for each statement. For planning purposes, the auditor should use the

a. levels separately
b. largest aggregate level
c. average of these levels
d. smallest aggregate level

d. smallest aggregate level

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

a. if a client has strong internal control
b. if a client is not publicly accountable entity
c. when the auditor has complied with the PH Standard on Auditing
d. under no circumstances

d. under no circumstances

Which of the following is a category of risk factors that should be considered in relation to misstatements arising from misappropriation of assets

a. industry conditions
b. operating characteristics
c. management characteristics
d. controls

d. controls

Which of the following is a category of risk factors that should be considered in relation to fraudulent financial reporting

a. susceptibility of assets to misappropriation
b. assets that can be easily be converted to cash
c. industry conditions
d. internal controls

c. industry conditions

As the acceptable level of detection risk decreases, an auditor would LEAST likely change

a. the timing of substantive tests by performing them at year end
b. nature of substantive tests from a less effective to a more effective procedure
c. timing of tests of controls by performing them at several dates rather than at one time
d. extent of substantive tests such as using larger sample size

c. timing of tests of controls by performing them at several dates rather than at one time

As the acceptable level of detection risk decreases the auditor may

a. perform tests of control at year end rather than at interim
b. increase the level of inherent and control risks
c. design more effective substantive procedures
d. use larger sample size for tests of controls

c. design more effective substantive procedures

The main purpose of risk assessment procedure is to

a. obtain an understanding of the entity and its environment, including its internal control: and to assess the risks of material misstatement at the financial statement and assertion level
b. test the operating effectiveness of controls in preventing, or detecting and correcting, material misstatements at the assertion level
c. detection material misstatements at the assertion level
d. all of the given choices are main purposes of risk and assessment procedures

a. obtain an understanding of the entity and its environment, including its internal control: and to assess the risks of material misstatement at the financial statement and assertion level

Which of the following is the correct order of steps in the audit process?
A. perform tests of control
B. develop an overall strategy for the expected conduct and scope of the audit
C. obtain client’s written representation
D. prepare an engagement letter
E. perform substantive tests

a. D A B E C
b. D B A E C
c. D B C A E
d. D B E A C

b. D B A E C