Name: Date: Score:

I. MULTIPLE CHOICE (10 items x 2 points)

1. Which of the following is NOT a consideration when the auditor is attempting to assess the inherent risk?
a. The nature of client’s business
b. Existence of related parties
c. Frequency and intensity of top management’s review of the accounting transactions and records
d. Susceptibility to defalcation
2. Which of the following is an example of the concept of inherent risk?
a. Humans make more errors than computers; therefore, a manual accounting system is riskier than a
computerized system
b. Accounting systems with vouchers have many more controls built in, so the risk that there will be errors on
the financial statements is reduced
c. Loans receivable for a financial company are less likely to be collectible than those of a bank
d. Audits with larger sample sizes are less risky than those with smaller sample sizes
3. Because control risk and inherent risk vary from cycle to cycle, account to account, or objective to objective,
a. Acceptable audit risk must remain a constant.
b. Detection risk and required audit evidence will also vary.
c. Detection risk will vary, but audit evidence will remain constant.
d. Detection risk will remain constant, but audit evidence will vary.
4. After obtaining an understanding of an entity’s internal control structure and assessing control risk, an auditor
may now
a. Perform tests of controls to verify management’s assertions that are embodied in the financial
statements.
b. Consider whether an evidential matter is available to support a further reduction in the assessed level of
control risk.
c. Apply analytical procedures as substantive tests to validate the assessed level of control risk.
d. Evaluate whether the internal control structure policies and procedures have detected material
misstatements in the financial statements.
5. When conducting an audit, errors that arouse suspicion of fraud should be given attention more than other errors.
This is an example of applying the criterion:
a. Reliability of evidence
b. Materiality
c. Risk
d. Dual-purpose testing
6. When an independent auditor’s examination of financial statements discloses special circumstances that make the
auditor suspect that material errors and irregularities may exist, the auditor’s initial course of action should be to
a. Recommend that the client pursue the suspected fraud to a conclusion that is agreeable to the auditor.
b. Extend the normal audit procedures in an attempt to detect the full extent of the suspected fraud.
c. Reach an understanding with the proper client representative as to whether the auditor or the client is to
make the investigation necessary to determine if fraud has, in fact, occurred.
d. Decide whether the fraud, if it should exist, might be of such a magnitude as to affect the auditor’s report in
the financial statements.
7. The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to
as:
a. Account risk
b. Control risk
c. Detection risk
d. Inherent risk
8. The risk that the auditor’s procedures will lead them to conclude that a material misstatement does not exist in an
account balance when such misstatement does exist is referred to as:
a. Account risk
b. Control risk
c. Detection risk
d. Inherent risk
9. As the acceptable level of detection risk decreases, the assurance directly provided from:
a. Substantive tests should increase.
b. Substantive tests should decrease.
c. Tests of controls should increase.
d. Tests of controls should decrease.
10. As the acceptable level of detection risk decreases, an auditor may change the:
a. Timing of substantive tests by performing them at an interim date rather than year-end
b. Nature of substantive tests from less effective to a more effective procedure
c. Timing of tests of controls by performing them at several dates rather than at one (1) time
d. Assessed level of inherent risk to a higher amount