AUD -2

Question 1

Which of the following statements regarding the risk of material misstatement is correct?

A.	Detection risk is the risk that a material misstatement will not be detected by the entity’s controls.

B.	The risk of material misstatement includes the auditor’s assessment of inherent risk as well as control risk.

C.	The risk that a material misstatement may occur due to complex calculations, faulty estimates, or high volume transactions is known as control risk.

D.	Only factual misstatements should be considered when making the assessment of risk and the determination of any adjustments that may need to be made.

Answer 1

Choice “B” is correct. Inherent and control risk are both components of the risk of material misstatement.

Choice “A” is incorrect. The risk described in this statement is control risk.

Choice “C” is incorrect. The risk described in this statement is inherent risk.

Choice “D” is incorrect. Factual, judgmental, and projected misstatements should be considered when assessing risk and determining what adjustments to make.

Question 2

According to COSO, management oversight of the effectiveness of internal control provides evidence for which of the following control components?

A.	Control activities

B.	Monitoring activities

C.	Risk assessment

D.	Information and communication

Answer 2

Choice “B” is correct. The monitoring component involves ongoing and/or separate evaluations, which can consist of oversight, reviews, or inspections. These activities are performed by qualified individuals, including members of management.

Choice “A” is incorrect. The control activities component does not include management oversight. It includes selecting and developing control activities and technology controls and then the deployment of policies and procedures.

Choice “C” is incorrect. The risk assessment component does not include management oversight. It includes specifying objectives and identifying and analyzing risks, including potential fraud risks.

Choice “D” is incorrect. The information and communication component does not include management oversight. It includes obtaining, using, and communicating information within an organization and with external parties.