Audit Risks and Materiality Sample Questions

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Audit Risk and Materiality

MULTIPLE CHOICE:

1.An auditor compares 2002 revenues and expenses with those of the prior year and investigates all changes exceeding 10%. By this procedure the auditor would be most likely to learn that a. An increase in property tax rates has not been recognized in the client's accrual. b. The 2002 provision for uncollectible accounts is inadequate, because of worsening economic conditions. c. Fourth quarter payroll taxes were not paid. d. The client changed its capitalization policy for small tools in 2002.

ANSWER: D

2.The element of the audit planning process most likely to be agreed upon with the client before implementation of the audit strategy is the determination of the
a. Timing of inventory observation procedures to be performed. b. Evidence to be gathered to provide a sufficient basis for the auditor's opinion. c.Procedures to be undertaken to discover litigation, claims, and assessments. d. Pending legal matters to be included in the inquiry of the client's attorney.

ANSWER: A

3. When a CPA is approached to perform an audit for the first time, the CPA should make inquiries of the predecessor auditor. This is a necessary procedure because the predecessor may be able to provide the successor with information that will assist the successor in determining

a. Whether the predecessor's work should be utilized. b. Whether the company follows the policy of rotating its auditors. c. Whether, in the predecessor's opinion, internal control of the company has been satisfactory.

d. Whether the engagement should be accepted.

ANSWER: D

4.Having evaluated inherent risk and control risk, the auditor determines detection risk a.As the complement of overall audit risk.
b.By performing substantive audit tests.
c.As a product of further study of the business and industry and application of analytical procedures. d.At a level that equates the joint probability of inherent risk, control risk, and detection risk with overall audit risk.

ANSWER: D

5.Which of the following is not a factor that affects the auditor's judgment, during audit planning, as to the quantity, type, and content of working papers?
a. The auditor's preliminary assessment of control risk. b. The auditor's preliminary evaluation of inherent risk based on discussions with the client. c. The nature of the client’s business.

d. The type of report to be issued by the auditor.

ANSWER: D

6. How can the audit program best be described at the
beginning of the audit process?
a. Tentative. b. Conclusive. c. Comprehensive. d. Optional.

ANSWER: A

7.The auditor's analytical procedures will be facilitated if the client a. Uses a standard cost system that produces variance reports. b. Segregates obsolete inventory before the physical inventory count.

c. Corrects material weaknesses in internal control before the beginning of the audit.
d. Reduces inventory balances to the lower of cost or market.

ANSWER: A

8.Experience has shown that certain conditions in an organization are symptoms of possible management fraud. Which of the following conditions would not be considered an indicator of possible fraud?

a. Managers regularly assuming subordinates' duties. b. Managers dealing in matters outside their profit center's scope. c. Managers not complying with...
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