Multiple Choice Question
1. Management integrity affects all of the following risks except:
a. Enterprise risk
b. Financial reporting risk
c. Engagement risk
d. All of the above
2. An external auditor is interested in whether or not a company has implemented an effective Enterprise Risk Management process because:
a. It reduces the likelihood that an organization will fail.
b. It provides a framework for the company to develop broad-based controls.
c. It provides a framework to reduce financial statement misstatements.
d. All of the above.
3. Which of the following would not be a source of information about risk of a potential new audit client?
a. The previous auditor
b. Management
c. The Internet
d. The PCAOB
4. An engagement letter should be written before the start of an audit because:
a. It may limit the auditor's legal liability by specifying the auditor's responsibilities.
b. It specifies the client's responsibility for preparing schedules and making the records available to the auditor.
c. It specifies the expected cost of the audit for the upcoming year.
d. All of the above.
5. If the auditor has concerns about the integrity of management, which of the following would not be an appropriate action?
a. Refuse to accept the engagement because a client does not have an inalienable right to an audit.
b. Expand audit procedures in areas where management representations are normally important by requesting outside verifiable evidence.
c. Raise the audit fees to compensate for the risk inherent in the audit, but do not plan any extended audit procedures.
d. Plan the audit with a higher degree of skepticism, including specific procedures that should be effective in uncovering management fraud.
6. Which of the following combinations of engagement risk, audit risk, and materiality would lead to the most audit work?

7. Which of the following would not be considered a limitation of the audit risk model?
a. The model treats each risk component as a separate and independent factor when some of the factors are related.
b. Inherent risk is difficult, if not impossible, to formally assess.
c. It is difficult, if not impossible, to formally assess either control or detection risk.
d. The model provides an overall framework for determining the allocation of audit work to riskareas.

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Engagement Risk a. Low b. Moderate c. Low d. High Audit Risk High Lowest Moderate High Materiality High Lowest Lowest High