MULTIPLE-CHOICE QUESTIONS

1. Which of the following characteristics would lead the auditor to assess control risk at a higher level?

a. It is difficult for the auditor to determine or gain access to the organization or individuals who own and/or control the entity.

b. The organization has inadequate accounting staff, or the staff lacks requisite expertise.

c. There exists a lack of supervision of accounting personnel.

d. The organization has inadequate information and communication systems.

e. All of the above.

2. Which of the following statements is true regarding analytical techniques?

a. Ratio analysis takes advantage of economic relationships between two or more accounts.

b. Ratio and trend analysis are generally carried out through a comparison of client data with expectations based on industry data, prior-period data, and expectations developed from industry trends, client budgets, and so on.

c. Developing expectations is the first step in performing analytical procedures.

d. All of the above are true.

3. Which of the following statements is false regarding brainstorming?

a. Brainstorming is a group discussion designed to encourage auditors to creatively assess client risks, particularly those relevant to the possible existence of fraud in an organization.

b. Brainstorming predominantly occurs during the early planning phases of the audit.

c. To facilitate the generation and evaluation of quality ideas during the brainstorming session, a typical practice during brainstorming is to invite criticism and value judgments about ideas generated.

d. Participants are encouraged to provide more ideas rather than fewer, with the intent to generate a variety of possible risk assessment scenarios that can be explored during the conduct of the audit.

e. All of the above are true.

4. Assume that the auditor sets audit risk at a low level, equal to 1%. What is the appropriate interpretation of this level of audit risk?

a. The auditor is willing to take only a 1% chance that audit procedures will not detect a material misstatement.

b. The auditor is 99% confident that the audit procedures will detect a material misstatement.

c. The auditor is willing to take only a 1% chance of expressing an audit opinion that the financial statements are fairly presented when they are materially misstated.

d. The auditor is 99% confident that the audit opinion is correct.

5. Assume for Client X that inherent risk is assessed at 30%, control risk is assessed at 100%, audit risk is 5%, and detection risk is therefore determined to be 17%. Assume for Client Z that inherent risk is assessed at 100%, control risk is assessed at 100%, audit risk is 1%, and detection risk is therefore determined to be 1%. What is true about the amount of audit work that will need to be conducted?

a. Client X will require more audit work than Client Z.

b. Client Z will require more audit work than Client X.

c. Both clients will require a similar amount of audit work.

d. The auditor will most likely resign from the Client Z audit because the inherent risk and control risk are so high.

6. When considering responses to risk at the individual assertion level, the auditor should do which of the following?

a. Evaluate the reasons for the assessed risk of material misstatement.

b. Estimate the likelihood of material misstatement due to the inherent risks of the client.

c. Consider the role of internal controls, and determine whether control risk is relatively high or low, thereby determining whether the auditor should rely on controls or whether the auditor needs to conduct a more substantive audit.

d. Obtain more relevant and reliable audit evidence as the auditor's assessment of the risk of material misstatement increases.

e. All of the above.

7. Which of the following statements is false regarding the nature, timing, and extent of risk responses?

a. The nature of risk response refers to the types of audit procedures applied given the nature of the account balance and the most relevant assertions regarding that account balance.

b. The timing of risk response refers to when audit procedures are conducted and whether those procedures are conducted at announced or predictable times.

c. When the risk of material misstatement is low, the auditor conducts the audit procedures closer to year end, on an unannounced basis, and includes some element of unpredictability in the timing of procedures.

d. The extent of risk response refers to the sufficiency of evidence that is necessary given the client's assessed risks, materiality, and the acceptable level of audit risk.