Set 1 October 22.

2024
Quiz: Risk assessment procedures

1. Analytical procedures are performed in the planning stage because—

a. These replace test of balances and transactions exceeding scoping materiality
b. Study of financial ratios is acceptable practice to investigate unusual fluctuations
c. Statistical tests may lead to the discovery of material errors in the financial statements
d. Plausible relationships data are expected in the absence of opposing conditions

2. An auditor should inspect the minutes of the meeting of the BOD--

a. Through the date of the financial statements c. Only at the beginning of the audit
b. Through the date of the audit report d. On a test basis

3. Risk assessment procedures would include all the following except --

a. Inquiries of management & governance c. Observation and inspection
b. Analytical procedures d. Setting of preliminary materiality

4. Risk assessment procedures are performed by auditors during an audit to determine--

a. The material misstatements in account balances c. The level of materiality
b. The acceptable level of audit risk d. Whether engagement will be accepted

5. Which among the statements below is not true about inquiry?

a. Used extensively throughout the audit in addition to other audit procedures
b. Formal inquiry is most effective in every instance of its application
c. It seeks information from both financial and non-financial matters of operation
d. Information gathered needs to corroborated with other data collected.

6. Auditors perform risk assessment procedures to understand the entity and its environment through one of these activities
a. Understanding the entity’s internal control c. Understanding processes that misses the goals
b. Identifying the client’s strategy d. Understanding the client’s resource management

7. An identified and assessed risk of material misstatement that in the auditor’s judgment, requires special audit consideration
a. Non-compliance risk c. Financial reporting risk
b. Significant risk d. Engagement risk

8. Understanding the plant layout and manufacturing process of the entity is what risk assessment procedure?
a. Inquiries c. Observation and Inspection
b. Analytical process d. Documentation

9. What following audit activity would pertain to observation process?

a. Take notice how raw materials are issued from warehouse to production
b. Evaluating internal controls through manuals of procedures
c. Reconciling control accounts with subsidiary ledgers
d. Reading proposals submitted by consultants

10. In inquires with the corporate legal department, what will be obtained by the auditor in the process?
a. Design and effectiveness of internal control
b. Processing of transactions and events to be recognized
c. Management’s response to any finding in risk assessment
d. Warranties offered by sales department on product sold

11. Level of risk relative to financial statement as whole or outside itself arising from management decision or external
factors is:
a. Assertion level c. Financial statement level
b. Specific level of risk d. Performance level

12. Which activity below is considered a risk assessment procedure of an auditor?

a. Interview of different level of authority c. hiring competent employees and officers
b. Delegation of responsibilities d. mitigation by management of identified risks

13. Analytical procedures used in planning an audit can be—

a. Seeking information of knowledgeable persons c. Comparing client’s ratio vs. industry
b. Inspection of documents, records, and manuals d. Looking at business plans and strategies

14. In obtaining an understanding of the relevant industry, regulatory, and other external factors, the auditor may consider
a. Process that creates demand for product c. related parties
b. Research & development expenditures d. Bargaining powers of customers

15. To obtain an understanding of the nature of the entity, the auditor should best consider the entity’s
a. Operation, ownership & governance c. complex calculations or accounting principles
b. Complexity of the transaction d. changes in key personnel with accounting skills
16. To obtain an understanding of the entity’s objectives, strategies and business risks, the auditor may consider matters on
a. Compatibility of IT systems and processes c. reports prepared by management & governance
b. Transactions through the information system d. taxation & trade restrictions

17. Auditors should obtain an understanding of the measurement and review the entity’s financial performance because
a. Objectives and strategies are related matters c. Compensation & incentives are tied to these matters
b. These dictates directly the profit & loss d. These determines business risks

18. The auditor’s understanding of the entity and its environment consists of an understanding of the following except:
a. Industry, regulatory, & applicable financial reporting framework
b. Entity’s selection of marketing and production personnel
c. Nature of the entity, and application of accounting policies
d. Measurement and review of the entity’s financial performance

19. In obtaining an understanding of the entity and its environment, which of the following is not an example of matters
relating to regulatory environment that the auditor would consider?
a. Legislations affecting the entity’s operation c. Product technology relating the entity’s product
b. Regulatory framework for a regulated industry d. Taxation

20. The risk of material financial misstatement may be greater when he following conditions exist except:
a. Greater management intervention to specify accounting treatment
b. Greater manual intervention for data collection and processing
c. Complex calculations or accounting principles
d. Sufficient personnel with appropriate accounting and financial reporting skills

21. The auditor’s understanding of the entity and its environment consists of an understanding of the following
aspects of the business:
a. Risk Assessment Procedures to be applied for the engagement
b. Financial reporting framework based on legislative requirements
c. Nature, timing, and extent of the audit
d. Inverse relationship between detection risk and control risk

22. Under PSA 315, the auditor must understand the entity and its environment through consideration of the nature of
the business. This aspect would include understanding the following, except:
a. Geographic dispersion or industry segmentation c. Capital investment activities
b. Developed plausible relationships d. Mergers, or disposal of business assets

23. The management in attaining its objectives would formulate strategies to attain them. But in attaining the objectives,
the entity will face significant risks which should be mitigated. Among the identified risk is:

a. Information risk c. Risk in interruption of supplies of raw material

b. Risk of audit period extension d. Risk in failure to detect material misstatement

24. The auditor should obtain an understanding of the measurement and review of entity’s financial performance as this
may create pressure to motivate management to improve performance or:
a. Disregard identified causes of audit detection failures c. Engage in fraud of financial data
b. Lay-off key members in audit team for cost-cutting d. Shorten audit period for lesser fees

25. Which following account balances has the least capability of misstatement?
a. Cash equivalent (trust certificates) c. Prepaid expense
b. Raw Material Inventory d. Minimal cash deposit in closed bank

26. As the risk of material misstatement increases, detection risk should

a. Remain constant c. Decrease
b. Increase d. Increase or decrease depending on evidence gathered

27. For a particular assertion, control risk is the risk that

a. A material misstatement will occur in the accounting process
b. Controls will not detect a material misstatement that occurs
c. Audit procedures will fail to detect a weak internal control system
d. The prescribed control procedures will not be applied uniformly

28. The risk that the auditor’s own work will lead to the decision that material misstatements do not exist in the financial
statement, when in fact such misstatements do exist, is:
a. Inherent risk c. Audit risk
b. Detection risk d. Control risk

29. It is appropriate and acceptable under PAS for an auditor to

a. Assess control risk at zero and perform a minimum of detection work
b. Assess inherent risk at zero and perform minimal detection work
c. Asses both inherent and control risk at 100% and perform extensive detection work
 d. Decide that audit risk can be 40%

30. Inherent is risk is reduced where the likelihood of theft to an account is low. This would be true for an account such
as:
a. Intangible Assets c. Cash on hand
b. Marketable Securities d. Merchandise Inventory

31. In determining planned audit risk, the auditor plans to reduce audit risk to the lowest possible by considering this
factor:
a. Effectivity of Internal Control system
b. Possible financial difficulties as indicated in analysis of financial data
c. Judgment required in accounting of estimates
d. Specific guidelines in setting individual audit risk

32. As the audit progresses additional information about the client is obtained, the acceptance level of audit risk:
a. Should not be modified in whatever event c. Must be consistent at any cost
b. May not be reduced/increased as it is invalid d. May be modified

33. If the auditor sets acceptable audit risk to 5%, inherent risk at 100%, and control risk at 50%, the resulting detection
risk is 10%. If control risk, however, has been 80%, planned detection risk would be (answer is rounded-off for
simpler application):
a. 16% c. 5%
b. 5% d. 6%

34. If the auditor’s assessment of control risk is Low, and Inherent risk is High, the Planned Detection risk will be:
a. Highest c. Medium
b. Lower d. Higher

35. If the auditor’s assessment of Inherent risk is High, and Control risk is High, the Planned Detection risk will be
a. Higher c. Highest
b. Lowest d. Lower

36. Which of the following is least likely to be considered when assessing inherent risk?
a. Nonroutine transactions c. Susceptibility theft
b. Estimation transactions d. Expected effectiveness of controls

37. The auditor’s objective during an observation of a client’s physical inventory count is to
a. Obtain direct knowledge that the inventory exists and has been properly counted
b. Discover if client has counted a particular group of items
c. Provide an appraisal of the quality of inventories for the accounting period
d. Supervise the conduct of the count to obtain assurance that quantities are reasonable

38. An inherent risk of 40% and a control risk of 60% affect planned detection risk and planned evidence differently than an
a. IR of 60% and CR of 40% c. IR of 100% land CR of 24%
b. IR of 80% and CR of 30% d. IR of 70% and CR of 30%

39. Which of the following is least likely to be considered when assessing inherent risk?
a. Nature of client’s business c. Related parties
b. Management integrity d. Client motivation

40. Which of the following misstatements or questionable practices may be uncovered if an auditor tours an entity’s
production facility?
a. Insurance coverage on facilities has become overdue
b. Overhead has been overapplied
c. Necessary facility maintenance has not been performed
d. Depreciation expense on fully depreciated equipment were neglected

***End of Quiz***