Messier 11e Chapter 04 Test Bank Answer Key PDF

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This is a practice test with answers to help study for class exams to help improve scores on your exam. This helps gain a better understanding of auditing....

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Auditing & Assurance Services: A Systematic Approach, 11e (Messier) Chapter 4 Risk Assessment 1) Audit risk is the auditor's exposure to loss or injury of his or her reputation from events arising in connection with financial statements audited. Answer: FALSE Difficulty: 1 Easy Topic: Audit Risk Learning Objective: 04-01 Understand the concept of audit risk. Bloom's: Remember AACSB: Communication AICPA: BB Legal; FN Risk Analysis 2) Engagement risk is the auditor's exposure to loss or injury of his or her reputation from events arising in connection with financial statements audited. Answer: TRUE Difficulty: 1 Easy Topic: Audit Risk Learning Objective: 04-02 Learn the form and components of the audit risk model. Bloom's: Remember AACSB: Communication AICPA: BB Legal; FN Risk Analysis 3) The components of the audit risk model include inherent risk, control risk, and detection risk. Answer: TRUE Difficulty: 1 Easy Topic: Audit Risk Learning Objective: 04-02 Learn the form and components of the audit risk model. Bloom's: Remember AACSB: Communication AICPA: BB Legal; FN Risk Analysis 4) Inherent risk is the susceptibility of an assertion to material misstatement, assuming no related controls. Answer: TRUE Difficulty: 1 Easy Topic: Audit Risk Learning Objective: 04-02 Learn the form and components of the audit risk model. Bloom's: Remember AACSB: Communication AICPA: BB Legal; FN Risk Analysis 1 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5) Professional judgment must be used when evaluating business risk. Answer: TRUE Difficulty: 1 Easy Topic: Audit Risk Learning Objective: 04-04 Understand the auditor's risk assessment process. Bloom's: Understand AACSB: Communication AICPA: BB Legal; FN Risk Analysis 6) The risk of a material misstatement includes inherent risk and sampling risk. Answer: FALSE Difficulty: 1 Easy Topic: Audit Risk Learning Objective: 04-02 Learn the form and components of the audit risk model. Bloom's: Remember AACSB: Communication AICPA: BB Legal; FN Risk Analysis 7) The combination of inherent risk and control risk is referred to as client risk. Answer: TRUE Difficulty: 1 Easy Topic: Audit Risk Learning Objective: 04-02 Learn the form and components of the audit risk model. Bloom's: Understand AACSB: Communication AICPA: BB Legal; FN Risk Analysis 8) Inherent risk includes sampling risk and detection risk. Answer: FALSE Difficulty: 1 Easy Topic: Audit Risk Learning Objective: 04-02 Learn the form and components of the audit risk model. Bloom's: Understand AACSB: Communication AICPA: BB Legal; FN Risk Analysis

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9) Engagement risk is: A) the risk of issuing an incorrect audit opinion. B) the auditor's risk of loss from events arising in connection with financial statements audited and reported upon. C) the overall risk of material misstatement. D) the risk of the entity's financial failure. Answer: B Difficulty: 1 Easy Topic: Audit Risk Learning Objective: 04-02 Learn the form and components of the audit risk model. Bloom's: Understand AACSB: Communication AICPA: BB Legal; FN Risk Analysis 10) Client risk as defined in the text is: A) the auditor's risk of loss from events arising in connection with financial statements audited and reported upon. B) the overall risk of material misstatement. C) the risk that audit procedures will fail to detect material misstatements. D) the risk of the entity's financial failure. Answer: B Difficulty: 1 Easy Topic: Audit Risk Learning Objective: 04-02 Learn the form and components of the audit risk model. Bloom's: Remember AACSB: Communication AICPA: BB Legal; FN Risk Analysis 11) Under Auditing Standards, which of the following would be classified as an error? A) Misappropriation of assets for the benefit of management. B) Misinterpretation by management of facts that existed when the financial statements were prepared. C) Preparation of records by employees to cover a fraudulent scheme. D) Intentional omission of the recording of a transaction to benefit a third party. Answer: B Difficulty: 1 Easy Topic: Assessing the Risk of Material Misstatement Learning Objective: 04-06 Understand the fraud risk assessment process. Bloom's: Apply AACSB: Ethics AICPA: BB Legal; FN Decision Making

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12) When assessing the risk of material misstatement, auditors evaluate the reasonableness of an entity's accounting estimates. An auditor normally would be concerned about assumptions that are: A) susceptible to bias. B) consistent with prior periods. C) insensitive to variations. D) similar to industry guidelines. Answer: A Difficulty: 1 Easy Topic: The Auditor's Risk Assessment Process Learning Objective: 04-04 Understand the auditor's risk assessment process. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Critical Thinking 13) Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements? A) Turnover of senior accounting personnel is low. B) Insiders recently purchased additional shares of the entity's stock. C) Management places substantial emphasis on meeting earnings projections. D) The rate of change in the entity's industry is slow. Answer: C Difficulty: 1 Easy Topic: Assessing the Risk of Material Misstatement Learning Objective: 04-06 Understand the fraud risk assessment process. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Critical Thinking 14) Which of the following is a factual misstatement? A) A management estimate that is outside the range of reasonable outcomes determined by the auditor. B) A fixed asset being recorded at the incorrect cost. C) A projected misstatement resulting from errors found during sampling. D) Difference in judgment between the auditor and management. Answer: B Difficulty: 2 Medium Topic: Assessing the Risk of Material Misstatement Learning Objective: 04-05 Learn how the auditor assesses the risk of material misstatement. Bloom's: Remember AACSB: Analytical Thinking AICPA: BB Critical Thinking; FN Measurement 4 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

15) Engagement risk can be eliminated by: A) establishing policies for client acceptance and continuance. B) lowering audit risk. C) lowering materiality. D) Engagement risk cannot be eliminated. Answer: D Difficulty: 2 Medium Topic: Audit Risk Learning Objective: 04-02 Learn the form and components of the audit risk model. Bloom's: Analyze AACSB: Communication AICPA: BB Legal; FN Risk Analysis 16) The achieved (actual) level of audit risk: A) can always be accurately assessed by the auditor. B) should be greater than or equal to acceptable audit risk. C) can never be known with certainty. D) is the same for all audit engagements. Answer: C Difficulty: 2 Medium Topic: Audit Risk Learning Objective: 04-02 Learn the form and components of the audit risk model. Bloom's: Understand AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Critical Thinking 17) An auditor knows that an audit client operating in an industry in which common stock is valued based on the price-earnings ratio will soon make an initial public offering. All of the following are true except: A) materiality should be reduced. B) risk of material misstatement should increase. C) detection risk should decrease. D) audit risk should increase. Answer: D Difficulty: 3 Hard Topic: Audit Risk; Assessing the Risk of Material Misstatement Learning Objective: 04-02 Learn the form and components of the audit risk model.; 04-05 Learn how the auditor assesses the risk of material misstatement.; 04-03 Understand how to use the audit risk model. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Industry 5 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

18) The risk that an auditor will conclude, based on substantive procedures, that a material error does not exist in an account balance when, in fact, such an error does exist is referred to as: A) sampling risk. B) detection risk. C) nonsampling risk. D) inherent risk. Answer: B Difficulty: 2 Medium Topic: Audit Risk Learning Objective: 04-02 Learn the form and components of the audit risk model.; 04-03 Understand how to use the audit risk model. Bloom's: Understand AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Critical Thinking 19) The risk of material misstatement differs from detection risk in that it: A) arises from the misapplication of auditing procedures. B) may be assessed in either quantitative or qualitative terms. C) exists independently of the actions of the auditor. D) can be changed at the auditor's discretion. Answer: C Difficulty: 2 Medium Topic: Audit Risk Learning Objective: 04-02 Learn the form and components of the audit risk model.; 04-03 Understand how to use the audit risk model. Bloom's: Understand AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Critical Thinking 20) All of the following are inherent risk factors that are pervasive to the financial statements except: A) highly complex significant transactions. B) non-routine transactions. C) classes of transactions are not processed systematically. D) supplies inventory is difficult to count. Answer: D Difficulty: 2 Medium Topic: Audit Risk Learning Objective: 04-02 Learn the form and components of the audit risk model.; 04-03 Understand how to use the audit risk model. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Industry 6 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

21) When an auditor increases the assessed level of risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase the: A) extent of tests of controls. B) level of detection risk. C) extent of substantive tests. D) level of inherent risk. Answer: C Difficulty: 3 Hard Topic: Audit Risk Learning Objective: 04-02 Learn the form and components of the audit risk model.; 04-03 Understand how to use the audit risk model. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Industry 22) On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of risk of material misstatement from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would: A) decrease amount of substantive testing. B) decrease detection risk. C) increase detection risk. D) increase materiality levels. Answer: B Difficulty: 3 Hard Topic: Audit Risk Learning Objective: 04-02 Learn the form and components of the audit risk model.; 04-03 Understand how to use the audit risk model. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Critical Thinking

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23) The risk of material misstatement includes which of the following? A) Detection risk B) Audit risk C) Inherent risk D) Nonsampling risk Answer: C Difficulty: 1 Easy Topic: Audit Risk Learning Objective: 04-02 Learn the form and components of the audit risk model. Bloom's: Remember AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Critical Thinking 24) An auditor learns that a client's employee in control of inventory gets divorced and is responsible for paying a large amount of child support. All of the following for the audit of inventory likely are true except: A) fraud risk increases. B) the risk of misappropriation of assets increases. C) risk of material misstatement increases. D) detection risk increases. Answer: D Difficulty: 2 Medium Topic: Audit Risk; Assessing the Risk of Material Misstatement Learning Objective: 04-02 Learn the form and components of the audit risk model.; 04-06 Understand the fraud risk assessment process.; 04-03 Understand how to use the audit risk model. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Industry 25) Which of the following audit risk components may be assessed in qualitative terms? A) Risk of material misstatement. B) Detection risk. C) Neither risk of material misstatement nor detection risk. D) Both risk of material misstatement and detection risk. Answer: D Difficulty: 2 Medium Topic: Audit Risk Learning Objective: 04-03 Understand how to use the audit risk model. Bloom's: Remember AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Critical Thinking 8 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

26) When an entity moves into a significant new line of business, all of the following increase except: A) client risk. B) acceptable audit risk. C) risk of material misstatement. D) entity business risk. Answer: B Difficulty: 2 Medium Topic: Audit Risk; The Auditor's Risk Assessment Process Learning Objective: 04-02 Learn the form and components of the audit risk model.; 04-04 Understand the auditor's risk assessment process. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Industry 27) Which of the following procedures would not be used to obtain an understanding of the entity and its environment? A) Observe entity operations. B) Reperform entity processes. C) Verify proper valuation of inventory subject to technological obsolescence. D) Review prior year's audit documentation. Answer: C Difficulty: 2 Medium Topic: The Auditor's Risk Assessment Process Learning Objective: 04-04 Understand the auditor's risk assessment process. Bloom's: Understand AACSB: Communication AICPA: FN Decision Making; BB Industry

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28) Which of the following is not an important consideration in an auditor's evaluation of an entity's business risk? A) The specific business risks an entity faces that may result in financial statement errors and fraud. B) Business risk factors that impact the ability of the entity to be profitable and survive. C) Audit standards include many entity business risk factors that identify circumstances that increase the likelihood of material misstatements. D) Audit standards require the auditor to evaluate the entity's business risk in order to provide suggestions to improve the entity's profitability. Answer: D Difficulty: 1 Easy Topic: The Auditor's Risk Assessment Process Learning Objective: 04-04 Understand the auditor's risk assessment process. Bloom's: Remember AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Critical Thinking 29) Which of the following is a source of detection risk? A) Unstable business environment. B) Poor client controls. C) A nonrepresentative sample. D) Inherent risk assessed too high. Answer: C Difficulty: 2 Medium Topic: Audit Risk Learning Objective: 04-02 Learn the form and components of the audit risk model. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Critical Thinking 30) In general, material frauds perpetrated by which of the following are most difficult to detect? A) Internal audit function. B) Keypunch operator. C) Cashier. D) Controller. Answer: D Difficulty: 2 Medium Topic: Assessing the Risk of Material Misstatement Learning Objective: 04-06 Understand the fraud risk assessment process. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Critical Thinking 10 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

31) Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity's financial statements? A) Accounts receivable confirmation requests yield significantly fewer responses than expected. B) Audit trails of computer-generated transactions exist only for a short time. C) The chief financial officer does not sign the management representation letter until the last day of the auditor's fieldwork. D) Management consults with other accountants about significant accounting matters. Answer: A Difficulty: 3 Hard Topic: Assessing the Risk of Material Misstatement; Evaluation of Audit Test Results; Responding to Risk Assessment Results Learning Objective: 04-05 Learn how the auditor assesses the risk of material misstatement.; 0407 Learn how to respond to the results of the risk assessments.; 04-08 Learn how to evaluate the results of the audit tests. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Critical Thinking 32) The primary responsibility for preventing fraud in an organization lies with: A) the audit committee of the board of directors. B) the internal audit function. C) the external auditor. D) the organization's management. Answer: D Difficulty: 2 Medium Topic: Assessing the Risk of Material Misstatement; The Auditor's Risk Assessment Process Learning Objective: 04-06 Understand the fraud risk assessment process.; 04-04 Understand the auditor's risk assessment process. Bloom's: Understand AACSB: Communication AICPA: FN Decision Making; BB Industry

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33) 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. Answer: A Difficulty: 2 Medium Topic: Assessing the Risk of Material Misstatement; Responding to Risk Assessment Results Learning Objective: 04-05 Learn how the auditor assesses the risk of material misstatement.; 0407 Learn how to respond to the results of the risk assessments. Bloom's: Analyze AACSB: Analytical Thinking AICPA: FN Decision Making; BB Critical Thinking 34) All of the following represent an increased opportunity for management to commit fraud except: A) significant related party transactions. B) the auditor's relationship with management is strained. C) management is dominated by a single person. D) the financial statements include highly subjective estimates. Answer: B Difficulty: 2 Medium Topic: Assessing the Risk of Material Misstatement Learning Objective: 04-06 Understand the fraud risk assessment process.; 04-05 Learn how the auditor assesses the risk of material misstatement. Bloom's: Apply AACSB: Analytical Thinking AICPA: FN Risk Analysis; BB Critical Thinking

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35) The auditor can respond to an increased risk of fraud by doing all of the following except: A) evaluating whether the accounting policies selected may be indicative of fraudulent financial reporting through earnings management. B) assigning more experienced personnel to the audit. C) increasing detection risk. D) taking steps to obtain more reliable evidence. Answer: C Difficulty: 2 Medium Topic: Audit Risk; Responding to Risk Assessment Results Learning Objective: 04-02 Learn the form and components of the audit risk model.; 04-07 Learn how to respond to the results of the risk assessments. Bloom's: Apply AACSB: An...