Question 1

Control risk is the probability that audit procedures will fail to detect material misstatements in the financial statements.

Accepted Answer

A) True 
 B)False

Question 2

There are two parts to business analysis: process analysis and industry analysis.

Accepted Answer

A) True 
 B)False

Question 3

An auditor can broadly define controls as:

Accepted Answer

A)  Those elements of an organization that taken together support people in achieving an organization's objectives.
B)  Those systems, processes and procedures which prevent fraud.
C)  Key performance indicators employed by management to measure an organization's success.
D)  The structure and culture of an organization which helps to eliminate risk.

Question 4

Company-level controls can have a big impact on a company's financial reporting.

Accepted Answer

A) True 
 B)False

Question 5

Internal control includes the following components:

Accepted Answer

A)  Control activities and inherent risks.
B)  Information systems and external influences.
C)  The control environment and risk assessment processes.
D)  Financial reporting and control activities.

Question 6

Risk should not be tolerated on a cost/benefit basis.

Accepted Answer

A) True 
 B)False

Question 7

An organization with a very hierarchical structure is typical of companies in complex business environments as this structure reduces the ability of a junior employee to make a wrong decision.

Accepted Answer

A) True 
 B)False

Question 8

An auditor's begins the identification of business risks by doing what?

Accepted Answer

A)  Preliminary analysis
B)  Financial analysis
C)  Strategic analysis
D)  Horizontal analysis

Question 9

In an overall audit risk is the probability that an auditor will give an inappropriate opinion on financial statements.

Accepted Answer

A) True 
 B)False

Question 10

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the

Accepted Answer

A)  Factors that raise doubts about the auditability of the financial statements.
B)  Operating effectiveness of internal control policies and procedures.
C)  Risk that material misstatements exist in the financial statements.
D)  Possibility that the nature and extent of substantive tests may be reduced.

Question 11

The business process view also highlights the fact that business organizations:

Accepted Answer

A)  Differ in terms of the technology they use.
B)  Essentially all perform the same activities.
C)  Should simplify their business to follow clear rules.
D)  Work best when run as a hierarchy.

Question 12

An auditor considers two factors in understanding business risks.They are:

Accepted Answer

A)  The likelihood of a risk occurring and the materiality of the risk.
B)  The magnitude of the risk and the type of risk.
C)  The likelihood of the risk occurring and the type of risk.
D)  The likelihood of a risk occurring and the magnitude the risk.

Question 13

What is the connection between communication and internal control?

Accepted Answer

Communication involves providing an unde...

Question 14

When an auditor increases the planned assessed level of control risk because certain control procedures were determined to be ineffective, the auditor would most likely increase the

Accepted Answer

A)  Extent of tests of details.
B)  Level of inherent risk.
C)  Extent of tests of controls.
D)  Level of detection risk.

Question 15

A critical element of control is monitoring.What is likely to happen if management fails to monitor an internal control?

Accepted Answer

A)  Necessary improvements will not be identified.
B)  Personnel are likely to stop observing the control.
C)  The inherent risk of an error will increase.
D)  The auditor is likely to assume the control is working when it might not be.

Question 16

If control risk increases and all other risks in the audit risk model stay constant (except the one referred to below)  which of the following is correct?

Accepted Answer

A)  Detection risk must increase.
B)  Inherent risk will increase.
C)  Audit risk will decrease.
D)  Detection risk must decrease.

Question 17

The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor

Accepted Answer

A)  Obtains reasonable assurance about whether the financial statements are free of material misstatement.
B)  Assesses the accounting principles used and also evaluates the overall financial statement presentation.
C)  Realizes some matters, either individually or in the aggregate, are important while other matters are not important.
D)  Is responsible for expressing an opinion on the financial statements, which are the responsibility of management.

Question 18

The acceptable level of detection risk is inversely related to the

Accepted Answer

A)  Assurance provided by substantive tests.
B)  Risk of misapplying auditing procedures.
C)  Preliminary judgment about materiality levels.
D)  Risk of failing to discover material misstatements.

Question 19

Management's philosophy and operating style has to do with how the business is operated and is not part of the internal control environment.

Accepted Answer

A) True 
 B)False

Question 20

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk 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

Accepted Answer

A)  Decrease substantive testing.
B)  Decrease detection risk.
C)  Increase inherent risk.
D)  Increase materiality levels.

Exam 7: Assessing Risks and Internal Control

A critical element of control is monitoring.What is likely to happen if management fails to monitor an internal control?

Correct AnswerverifiedShow Answer

Control risk is the probability that audit procedures will fail to detect material misstatements in the financial statements.

Correct AnswerverifiedShow Answer

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk 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

Correct AnswerverifiedShow Answer

An auditor's begins the identification of business risks by doing what?

Correct AnswerverifiedShow Answer

Risk should not be tolerated on a cost/benefit basis.

Correct AnswerverifiedShow Answer

The acceptable level of detection risk is inversely related to the

Correct AnswerverifiedShow Answer

In an overall audit risk is the probability that an auditor will give an inappropriate opinion on financial statements.

Correct AnswerverifiedShow Answer

When an auditor increases the planned assessed level of control risk because certain control procedures were determined to be ineffective, the auditor would most likely increase the

Correct AnswerverifiedShow Answer

An auditor considers two factors in understanding business risks.They are:

Correct AnswerverifiedShow Answer

The existence of audit risk is recognized by the statement in the auditor's standard report that the auditor

Correct AnswerverifiedShow Answer

Company-level controls can have a big impact on a company's financial reporting.

Correct AnswerverifiedShow Answer

An organization with a very hierarchical structure is typical of companies in complex business environments as this structure reduces the ability of a junior employee to make a wrong decision.

Correct AnswerverifiedShow Answer

The ultimate purpose of assessing control risk is to contribute to the auditor's evaluation of the

Correct AnswerverifiedShow Answer

What is the connection between communication and internal control?

Correct AnswerverifiedCommunication involves providing an unde...View AnswerShow Answer

The business process view also highlights the fact that business organizations:

Correct AnswerverifiedShow Answer

Management's philosophy and operating style has to do with how the business is operated and is not part of the internal control environment.

Correct AnswerverifiedShow Answer

If control risk increases and all other risks in the audit risk model stay constant (except the one referred to below) which of the following is correct?

Correct AnswerverifiedShow Answer

An auditor can broadly define controls as:

Correct AnswerverifiedShow Answer

Internal control includes the following components:

Correct AnswerverifiedShow Answer

There are two parts to business analysis: process analysis and industry analysis.

Correct AnswerverifiedShow Answer

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Communication involves providing an unde...
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