Audit Risks

1. Audit risk consists of inherent risk, control risk, and detection risk. Which of the following statements is
true?
a. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
b. The risk that material misstatement will not be prevented or detected on timely basis by internal control
can be reduced to zero by effective controls.
c. Detection risk is a function of the efficiency of an auditing procedure.
d. The existing levels of inherent risk, control risk, and detection risk can be changed at the discretion of
the auditor.

2. Which of the following audit risk components may be assessed in non-quantitative terms?
Control Detection Inherent
risk risk risk
a. Yes Yes No
b. Yes No Yes
c. Yes Yes Yes
d. No Yes Yes

3. As the acceptable level of detection risk decreases, an auditor may

a. Reduce substantive testing by relying on the assessment of inherent risk and control risk.
b. Postpone the planned timing of substantive tests from interim dates to the year end.
c. Eliminate the assessed level of inherent risk from the consideration as a planning factor.
d. Lower the assessed level of control risk from the maximum level to below the maximum.

4. Inherent risk and control risk differ from detection risk in that they
a. Arise from the misapplication of auditing procedures.
b. May be assessed in either quantitative or non-quantitative terms.
c. Exist independently of the financial statement audit.
d. Can be changed at the auditor’s discretion.

5. The existence of audit risk is recognized by the statement in the auditor’s standard report that the
a. Auditor is responsible for expressing an opinion on the financial statements, which are the
responsibilities of management.
b. Financial statements are resented fairly, in all material respects, in conformity with GAAP.
c. Audit includes examining, on a test basic, evidence supporting the amounts and disclosures in the
financial statements.
d. Auditor obtains reasonable assurance about whether the financial statements are free of material
misstatement.

6. On the basic of audit evidence gathered and evaluated, an auditors 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
a. Decrease substantive testing c. Decrease detection risk
b. Increase inherent risk d. Increase materiality level

7. As the acceptable level of detection risk increases, an auditor may change the
a. Assessed level of control risk from below the maximum to the maximum level.
b. Assurance provided by tests of controls by using a larger sample size than planned.
c. Timing of substantive tests from year-end to an interim date.
d. Nature of substantive tests from a less effective to a more effective procedures.

8. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are
a. Elements of audit risk while detection risk is not.
b. Changed at the auditor’s discretion while detection risk is not.
c. Considered at the individual account balances level while detection risk is not.
d. Functions of the client and its environment while detection risk is not.

9. The risk that an auditor will conclude, based on substantive tests, that a material error does not exist in
an account balance when, in fact, such error does exist is referred to as
a. Sampling risk c. Detection risk
b. Non-sampling risk d. Inherent risk

10. The audit risk against which the auditor and those who rely on his/her opinion require reasonable
protection is a combination of three separate risks at the account-balance or class-of-transactions level. The
first risk is inherent risk. The second risk is theta material misstatements will no be prevented or detected by
internal control. The third risk is that
a. The auditor will reject a correct account balance as incorrect.
b. Material misstatements that occur will lot be detected by the audit.
c. The auditor will apply an inappropriate audit procedure.
d. The auditor will apply an inappropriate measure of audit materiality.

11. Some account balances, such as those for pensions or leases, are the results of complex calculations.
The susceptibility to material misstatements in these types of accounts is defined as
a. Audit risk c. Detection risk
b. Sampling risk d. Inherent risk

12. As the acceptable level of detection risk decreases, an auditor may change the
a. Timing of substantive by performing them at an interim date rather than at year-end.
b. Nature
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c. Timing of tests of controls by performing them at several dates rather than at one time.

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 d. Assessed level of inherent risk to a higher amount.

13. The risk than an auditor’s procedures will lead to the conclusion that a material misstatement does not
exist in an account balance when, in fact, such misstatement does exist is
a. Audit risk c. Control risk.
b. Inherent risk. d. Detection risk.

14. Audit risk consists of inherent risk, control risk, and detection risk. Which of the following statements is
true?
a. Cash is more susceptible to theft than an inventory of coal because it has a greater inherent risk.
b. The risk that material misstatement will not be prevented or detected on timely basis by internal control
can be reduced to zero by effective controls.
c. Detection risk is a function of the efficiency of an auditing procedure.
d. The existing levels of inherent risk, control risk, and detection risk can be changed at the discretion of
the auditor.

15. The acceptable level of detection risk is inversely related to the

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.

16. When expressing an unqualified opinion, the auditor who evaluates the audit findings should be satisfied
that the
a. Amount of known misstatement is documented in the management representation letter.
b. Estimate of the total likely misstatement is less than a material amount.
c. Amount of known misstatement is acknowledged and recorded by the client.
d. Estimate of the total likely misstatement includes the adjusting entries already recorded by the client.

17. In the Audit Risk and Materiality in Conducting an Audi, the concepts of audit risk and materiality are
interrelated and must be considered together by the auditor. Which of the following is true?
a. Audit risk is the risk that the auditor may unknowingly express a modified opinion when in fact the
financial statements are fairly stated.
b. The phrase in the auditor’s standard report “present fairly, in all material respects, in conformity with
generally accepted accounting principles” indicates the auditor’s belief that the financial statements
taken as a whole are not materially misstated.
c. If misstatements are not important individually but are important in the aggregate, the concept of
materially does not apply.
d. Material fraud but not material errors cause financial statement to be materially misstated.

18. The standards gives a formula for risk relationship. Overall allowable audit risk (AR) is the risk that
monetary misstatement equal to tolerable misstatement may remain undetected. Control risk (CR) is the
auditor’s assessment of the risk that internal control may not prevent or detect material misstatements.
Inherent risk (IR) is the susceptibility of an assertion to material misstatement given no related controls. In
the audit risk formula, AP is the auditor’s assessment of the risk that analytical procedures and other
relevant substantive test will fail to detect material misstatement not detected by the relevant controls. TD
is the allowable risk of incorrect acceptance for a substantive test of details given that material’s
misstatements occurs in an assertion and not detected by internal control or by an analytical procedures
and other substantive tests. Which model represents the overall allowable audit risk?
a. AR=IR x CR x AP x TD.
b. AR=IR + CR +AP + TD.
c. AR=IR + CR – (AP + TD).
d. AR=IR + CR – (AP +TD).

19. The equation for the overall allowable audit risk (AR=IR x CR x AP X TD) is sometimes solve for TD (the
allowable risk of incorrect acceptance associated with a test of details) because
a. The most important element is TD.
b. This version of the formula assists in planning a specific substantive test of details.
c. The overall allowable audit risk cannot be determined.
d. Auditors always consider tests of details first.

20. The concept of materiality with respect to the attest function

a. Applies only to publicly held firm.
b. Has a greater application than the standards of reporting than the other generally accepted auditing
standard.
c. Requires that relatively more effort be directed to those assertion that are more susceptible to
misstatement.
d. Requires the auditor to make judgments as to whether misstatement affect the fairness of the financial
statements.

21. Following are four steps an auditor undertakes in assessing control risk:
(A) Determine what control procedures are used by the entity.
(B) Identify the system’s control objectives.
(C) Design tests of controls.
(D) Consider the potential errors of irregularities that could result.

In what
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a. DBAC b. BCDA c. BDAC d. BCAD

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 22. The auditor may change the assess level of inherent risk to a higher amount as the acceptable level of
detection risk decreases.

The auditor’s assessments of detection risk should not affect the assessed level of inherent risk.

As the acceptable level of detection risk decreases, an auditor may change the timing of substantive tests
by performing them at an interim date rather than at year-end.

a. First and second statements are not correct; the third statement is correct.
b. First statement is not correct; the second and third statements are correct.
c. First and second statements are correct; the third statement is not correct.
d. First statement is correct; the second and third statements are not correct.

23. The auditor’s primary objective is performing procedures to obtain an understanding of the internal
control structure is
a. to provide the auditor with evidential matter to use in assessing inherent risk.
b. to provide the auditor with a basis for modifying tests of control.
c. to provide the auditor with knowledge necessary for audit planning.
d. to provide the auditor with an evaluation of the consistency of application of management’s policies.

24. Relationship between control risk and detection risk is ordinarily

a. parallel b. direct c. inverse d. equal

25. The audit risk mode consists of: AR = IR x CR x DR

The detection risk is the dependent variable. What is the acceptable level of detection risk if the assessed
level of inherent risk is high and the control risk is low?
a. Highest b. Lower c. Medium d. Higher

26. As part of periodic planning exercise, a company discovers that an Eastern European political dispute
may interfere with supply sources. This is an example of
a. Control environment c. Control activities
b. Risk assessment d. Monitoring

27. Which of the following audit risk components may be assessed in non-qualitative terms?
a. Control risk and detection risk but not inherent risk
b. Control risk and inherent risk, but not detection risk
c. Control risk, detection risk and inherent risk
d. Detection risk and inherent risk, but not control risk

28. The ultimate purpose of assessing control risk is to contribute to the auditor’s evaluation of the risk that
a. Tests of controls may fail to identify controls relevant to assertions.
b. Material misstatements may exist in the financial statements.
c. Specified controls requiring segregation of duties may be circumvented by collusion.
d. Entity policies may be overridden by senior management.

29. The auditor faces a risk that the examination will not detect material errors in the financial statements.
In regard to minimizing this risk, the auditor primarily relies on
a. Substantive tests. c. Compliance tests.
b. Internal control. d. Statistical analysis.

30. The concepts of audit risk and materiality are interrelated and must be considered together by the
auditor. Which of the following is true?
a. Audit risk is the risk that the auditor may unknowingly express a modified opinion when in fact
the financial statements are fairly presented.
b. The phrase in the auditor’s report “present fairly, in all material respects, the financial position
of X Company as of December 31, 20X1, and of its financial performance and its cash flows for the year-
ended in accordance with Philippine Financial Reporting Standards,” indicates the auditor’s belief that
the financial statements taken as a whole are not materially misstated.
c. If misstatements are not important individually but are important in the aggregate, the concept
of materially does no apply.
d. Material fraud but not material errors cause financial statements to be materially misstated.

31. Certain management characteristics may heighten the auditor’s concern about the risk of material
misstatements. The characteristics that is least likely to cause concern is that management
a. Operating and financial decisions are made by numerous individuals.
b. Commits to unduly aggressive forecasts.
c. Has an excessive interest in increasing the entity’s stock price through use of unduly aggregate
accounting practices.
d. Is interested in inappropriate methods of minimizing earnings for tax purposes.

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