Which of the following circumstances most likely would cause the auditor to suspect that there are material misstatements in the entity’s financial statements?


The following questions concern the assessment of the risk of material misstatements. Choose the best response.

a. Which of the following circumstances most likely would cause the auditor to suspect that there are material misstatements in the entity’s financial statements?

(1) The entity’s management places no emphasis on meeting publicized earnings

(2) Significant differences between the physical inventory count and the accounting
records are not investigated.

(3) Monthly bank reconciliations ordinarily include several large outstanding checks.

(4) Cash transactions are electronically processed and recorded, leaving no paper audit trail.

b. Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud?

(1) Audit procedures that are effective for detecting an unintentional misstatement
may be ineffective for an intentional misstatement that is concealed through

(2) An audit is designed to provide reasonable assurance of detecting material er-
rors, but there is no similar responsibility concerning fraud.

(3) The factors considered in assessing control risk indicated an increased risk of intentional misstatements, but only a low risk of unintentional errors in the financial statements.

(4) The auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements as a whole.

c. Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mindset that the audit team should maintain during this discussion?
(1) Presumptive
(2) Judgmental
(3) Criticizing
(4) Questioning

The following questions concern the audit risk model. Choose the best response.
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
(1) audit risk.
(2) detection risk.
(3) inherent risk.
(4) sampling risk.

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b. 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
(1) sampling risk.
(2) inherent risk.
(3) control risk.
(4) detection risk.

c. Inherent risk and control risk differ from planned detection risk in that they
(1) arise from the misapplication of auditing procedures.
(2) may be assessed in either quantitative or nonquantitative terms.
(3) exist independently of the financial statement audit.
(4) can be changed at the auditor’s discretion.

The following questions deal with audit risk and evidence. Choose the best response.

a. Which of the following does not increase the need for sufficient appropriate audit evidence?
(1) A lower acceptable level of detection risk
(2) An increase in the assessed control risk
(3) A lower acceptable audit risk
(4) A decrease in the assessed inherent risk

b. As lower acceptable levels of both audit risk and materiality are established, the audi-
tor should plan more work on individual accounts to
(1) find smaller misstatements.
(2) find larger misstatements.
(3) increase the performance materiality in the accounts.
(4) increase inherent risk in the accounts.

c. An auditor may compensate for a high assessed level of control risk by increasing the:
(1) level of detection risk.
(2) extent of tests of controls.
(3) preliminary judgement of acceptable audit risk.
(4) extent of substantive tests.

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