Accounts

2)             The following are several multiple choice questions adapted from the CPA exam that cover audit risk.  For each question, selected the best answer and then explain why it is better than all the alternatives.  Your explanations should address all the possible alternatives presented in the question.

a)              Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as

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i)               audit risk.

ii)             detection risk.

iii)           inherent risk.

iv)           sampling risk.

Answer:

Explanation:

b)             As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the

i)               nature of audit procedures to more effective procedures.

ii)             timing of audit procedures, by perhaps performing them at year-end rather than an interim date.

iii)           extent of audit procedures, by perhaps using larger sample sizes.

iv)           assurances provided by audit procedures to a lower level.

Answer:

Explanation:

c)              Inherent risk and control risk differ from planned detection risk in that they

i)               arise from the misapplication of auditing procedures.

ii)             may be assessed in either quantitative or qualitative terms.

iii)           exist independently of the financial statement audit.

iv)           can be changed at the auditor’s discretion

Answer:

Explanation:

 

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