ACTIVITY 1: MULTIPLE CHOICE

1.Which of the following is an incorrect statement?

a.Detection risk cannot be changed at the auditor's discretion

b.If individual audit risk remains the same, detection risk bears an inverse relationship to inherent and control risks

c.The greater the inherent and control risk the auditor believes exists, the less detection risk that can be accepted

d.The auditor might make separate or combined assessments of inherent risk and control risk

2.Why would be auditor assess control risk?

a.Because it indicated where inherent risk may be the greatest

b.Because it determines whether sampling risk is sufficiently low

c.Because it affects the level of detection risk the auditor may accept

d.Because it includes the aspects of nonsampling risk that are controllable

3.The relationship between acceptable level of detection risk and the combined level of inherent and control risk is

a.Direct

b.Inverse

c.Parallel

d.Independent

4.The audit risk model consists of AR = IR x CR x DR

a.Highest

b.Medium

c.Lower

d.Higher

5.An auditor decides to increase the assessed level of control risk from that originally planned on the basis of audit evidence gathered and evaluated. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would

a.Decrease substantive testing

b.Increase inherent risk

c.Increase materiality levels

d.Decrease detection risk

6.As the acceptable level of detection risk decreases, the assurance directly provided from

a.Substantive tests should increase

b.Substantive tests should decrease

c.Tests of controls should increase

d.Tests of controls should decrease

7.Which of the following statements is true?

a.If control risk is assessed at maximum, the nature of related substantive test should be changed from more to less effective

b.If control risk is assessed at maximum, the nature of related substantive test should be changed from less to more effective

c.If control risk is assessed at maximum, the timing of related substantive test should be changed from year-end to an interim date

d.If control risk is assessed at maximum, the extent of related substantive test should be changed from a larger to a smaller sample

8.Which of the following is not a distinguishing feature of risk-based auditing?

a.Identifying areas posing the highest risk of financial statement errors

b.Analysis of internal control

c.Collecting and evaluating evidence

d.Concentrating audit resources in those areas presenting the highest risk of financial statement errors.

9.Which of the following factors is not a good indicator of potential financial failure?

a.Client is constantly short of cash and working capital

b.Client's retained earnings were reduced by half as a result of a large dividend payout

c.Client relies heavily on debt financing, especially by financing permanent assets with short-term loans

d.Client has had increasing net losses for several years

ACTIVITY 2: MULTIPLE CHOICE

1.If permission from client to discuss its affairs with the proposed auditor is denied by the client, the predecessor auditor should:

a.Keep silent of the denial

b.Disclose the fact that the permission to disclose is denied by the client

c.Disclose adequately to proposed auditor all noncompliance made by the client

d.Seek legal advice before responding to the proposed auditor

2.The objective and scope of the audit and the extent of the auditor's responsibilities to the client are best documented in

a.Independent auditor's report

b.Client's representation letter

c.Audit engagement letter

d.Audit program

3.The following are valid reasons why an auditor sends to his client an engagement letter:

abcd

Avoid misunderstanding with respect engagementYesYesNoYes

Confirms the auditor's acceptance of the appointmentYesYesYesNo

Objective and scope of the auditYesYesYesYes

Assures CPA's compliance to GAASYesNoNoYes

4.Which of the following is appropriately included in an audit engagement letter?

I.Because of the test nature and other inherent limitations of an audit, together with the inherent limitations of any accounting and internal control system, there is an unavoidable risk that even some material misstatements may remain undiscovered.

II.The audit will be made with the objective of expressing an opinion on the financial statements

III.An audit also includes assessing the accounting procedures used and significant estimates made by management

a.I and II

b.II and III

c.I and III

d.I, II, and III

5.Which of the following is least likely included in an audit engagement letter?

a.The objective of financial reporting

b.Management responsibility for the financial statements

c.The form of any reports or other communication of the results of the engagement

d.Arrangement concerning the involvement of other auditors or experts in some aspects of the audit

6.Which of the following generalizations in assessing the reliability of audit evidence is incorrect?

a.Audit evidence is more reliable when it is obtained from independent sources outside the entity

b.Audit evidence that is generated internally is not affected by the effectiveness of the controls imposed by the entity

c.Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained indirectly or by inference

d.Audit evidence is more reliable when it exists in documentary form

7.Which statement is incorrect regarding audit evidence

a.The auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion

b.Accounting records alone do not provide sufficient audit evidence

c.The auditor uses professional judgment and exercises professional skepticism in evaluating the quantity and quality of audit evidence, and thus its sufficiency and appropriateness, to support the audit opinion.

d.The matter of difficulty or expense involved is a valid basis for omitting an audit procedure for which there is no alternative

8.The auditor uses assertions in assessing risks by considering the different types of potential misstatements that may occur, and thereby designing audit procedures that are responsive to the assessed risks. Assertions used by the auditor fall into the following categories

I.Assertions about classes of transactions and events for the period under audit

II.Assertions about account balances at the period end

III.Assertions about presentation and disclosure

a.I, II, and III

b.I and II only

c.II and III only

d.II only

9.Assertions about classes of transactions and events for the period under audit least likely include

a.Transactions and events that have been recorded have occurred and pertain to the entity

b.All transactions and events that should have been recorded have been recorded

c.Transactions and events have been recorded in the correct accounting period

d.All assets, liabilities and equity interests that should have been recorded have been recorded

10.Assertion about account balances at period end which means assets, liabilities, and Equity interests are included in the financial statements at appropriate amounts is

a.Existence

b.Completeness

c.Rights and obligations

d.Valuation and allocation

11.An auditor's working papers will ordinarily be least likely to include documentation showing how the

a.Client's schedules were prepared

b.Engagement was planned

c.Understanding od the client's internal control was obtained and control risk was assessed

d.Unusual matters were resolved

12.Which of the following is usually included or shown in the auditor's working papers?

a.The procedures used by the auditor to verify the personal financial status of members of the client's management team

b.Analyses that are designed to be a part of, or a substitute for, the client's accounting records

c.Excerpts from authoritative pronouncements that support the underlying generally accepted accounting principles used in preparing the financial statements

d.The manner in which exceptions and unusual matters disclosed by the auditor's procedures were resolved or treated

13.The form and content of working papers are affected by matters such as the:

I.Nature of the engagement

II.Form of the auditor's report

III.Nature and complexity of the business

IV.Nature and condition of the entity's accounting and internal control systems

V.Needs in the particular circumstances for direction, supervision and review of work performed by assistants

VI.Specific audit methodology and technology used in the course of the audit.

a.All of the above

b.I, II and III only

c.All except V and VI

d.All except VI

14.Which of the following is not generally included in the working papers file?

a.An indication as to who performed the audit procedures and when they were performed

b.Documentation of the auditor's understanding of the accounting and internal control systems

c.Copy of the internal audit's audit program

d.Analyses of significant ratios and trends

15.Although the quantity and content of audit working papers vary with each particular engagement, an auditor's permanent files most likely include

a.Schedules that support the current year's adjusting entries

b.Prior years' accounts receivable confirmations that were classified as exceptions

c.Documentation indicating that the audit work was adequately planned and supervised

d.Analyses of capital stock and other owners' equity accounts

ACTIVITY 3:

1.Explain the concept of the risk-based audit approach according to what you have learned in this lesson

2.Enumerate the different activities in the Risk assessment phase of conducting the audit