Chapter 9

Q1: choose the correct answer :

1) Which of the following would not increase the risks of material misstatement at the
overall financial statement level?
A) effective oversight by the board of directors
B) deficiencies in management's integrity
C) inadequate accounting systems
D) all of the above

2) The auditor's responsibility section in an audit report states that "…the standards
require that we plan and perform the audit to obtain ________ assurance about whether
the financial statements are free of material misstatement." What type of assurance is
given?
A) immediate
B) limited
C) reasonable
D) absolute

3) ________ risk represents the auditor's assessment of the susceptibility of an assertion

to material misstatement, before considering the effectiveness of the client's internal
control.
A) Material
B) Account balance
C) Control
D) Inherent
4) Risk of material misstatement at the assertion level
A) is only relevant to account balances.
B) determines the nature, timing, and extent of further audit procedures.
C) refers to risks that are pervasive to the financial statements as a whole.
D) consists of business risk and inherent risk.

5) Risk assessment procedures include inquiries of management and others by the

auditor. As part of these procedures, the auditor should talk to
A) internal auditors.
B) board of directors.
C) individuals involved with regulatory compliance.
D) all of the above.

6) Risk assessment procedures include

A) a required discussion among the staff members of the audit and the client regarding
material misstatements in the financial statement.
B) determination of the type of audit opinion to issue.
C) observation of the entity's operations.
D) assessing acceptable audit risk.

7) When considering the risk of misstatement due to fraud,

A) the risk of not detecting a material misstatement due to fraud is lower than the risk of
not detecting a misstatement due to error.
B) the risk is only made at the financial statement level.
C) auditing standards require the auditor to presume that risk of fraud exist in expense
transactions.
D) auditing standards outline procedures the auditor should perform to obtain information
from management about their consideration of fraud .

8) A ________ risk represents an identified and assessed risk of material misstatement

that, in the auditor's professional judgment, requires special audit consideration.
A) material
B) substantial
C) financial statement
D) significant

9) Which of the following will generally be considered a significant risk?

A) a sale to a customer
B) the determination of the amount of bad debt expense
C) the purchase of inventory
D) obtaining a loan from the bank

10) Based on 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
A) increase materiality levels.
B) decrease detection risk.
C) decrease substantive testing.
D) increase inherent risk.
11) When dealing with audit risk,
A) auditors cannot accept any level of risk in performing the audit function.
B) most risks that auditors encounter are relatively easy to measure.
C) the audit risk model is only used for classes of transactions.
D) the audit risk model helps the auditor to decide how much and what types of evidence
to accumulate.

12) The measurement of the auditor's assessment of the susceptibility of an assertion to

material misstatement, before considering the effectiveness of related internal controls is
defined as
A) audit risk.
B) inherent risk.
C) sampling risk.
D) detection risk.

13) The risk that audit evidence for an audit objective will fail to detect misstatements
exceeding performance materiality levels is
A) audit risk.
B) control risk.
C) inherent risk.
D) planned detection risk.

14) If the auditor decides to reduce acceptable audit risk, planned detection risk
A) increases.
B) decreases.
C) stay the same.
D) cannot be determined.

15) Inherent risk is ________ related to planned detection risk and ________ related to
the amount of audit evidence.
A) directly; inversely
B) directly; directly
C) inversely; inversely
D) inversely; directly

16) Auditors frequently refer to the terms audit assurance, overall assurance, and level of
assurance instead of
A) detection risk.
B) audit report risk.
C) acceptable audit risk.
D) inherent risk.

17) If planned detection risk is reduced, the amount of evidence the auditor accumulates
will
A) increase.
B) decrease.
C) remain unchanged.
D) be indeterminate.

18) Planned detection risk

I. determines the amount of substantive evidence the auditor plans to accumulate.
II. is dependent on inherent risk and business risk.
A) I only
B) II only
C) I and II
D) neither I nor II

19) Inherent risk is often high for an account such as

A) inventory.
B) land.
C) capital stock.
D) notes payable.

20) Inherent risk and control risk

A) are inversely related to each other.
B) are inversely related to detection risk.
C) are directly related to detection risk.
D) are directly related to audit risk.

Q2: put true or false in front of each sentence :

1) The risk of material misstatement exists only at the overall financial statement level.
Answer: FALSE

2) Significant changes in the industry may increase the risk of material misstatement at
the assertion level.
Answer: FALSE

3) Inherent risk and control risk exist independent of the audit of the financial statements.
Answer: TRUE

4) The performance of risk assessment procedures is designed to help the auditor obtain
an understanding of the entity.
Answer: TRUE

5) Auditing standards require the engagement partner to be included in discussions about

the susceptibility of the client's financial statements to material misstatements.
Answer: TRUE
6) Auditors are not allowed to make inquires of employees who are not considered
management, such as marketing or sales personnel.
Answer: FALSE

7) Individuals engaged in conducting a fraud will generally not misrepresent information

to the auditor.
Answer: FALSE

8) The auditor's risk assessment for fraud should be ongoing throughout the audit.
Answer: TRUE

9) Significant risks often relate to routine transactions.

Answer: FALSE

10) The auditor must perform substantive tests related to assertions deemed to have
significant risks.
Answer: TRUE

11) The most important element of the audit risk model is control risk.
Answer: FALSE
12) The audit risk model that must be used for planning audit procedures and evaluating
audit results is:

= AAR
Answer: FALSE

13) If acceptable audit risk is low, and inherent risk and control risk are both low, then
planned detection risk should be high.
Answer: TRUE

14) If the audit assurance rate is 95%, then the level of acceptable audit risk is 5%.
Answer: TRUE

15) A high detection risk equates to a low amount of audit evidence needed.
Answer: FALSE

16) For a private company client, auditors are required to test any internal controls they
believe have not been operating effectively during the period under audit.
Answer: FALSE

17) There is a direct relationship between acceptable audit risk and planned detection
risk.
Answer: TRUE
18) Acceptable audit risk and the amount of substantive evidence required are inversely
related.
Answer: TRUE

19) As control risk increases, the amount of substantive evidence the auditor plans to
accumulate should increase.
Answer: TRUE

20) Inherent risk and control risk are directly related.

Answer: FALSE