Quiz 2

Question 1

Audit Committee

Answer 1

Subcommittee of the Board of Directors that is responsible for the
financial reporting and disclosure process

Required by SOX

Question 2

Internal audit should

Answer 2

functionally report to
the audit committee and administratively to CEO, CFO…

Question 3

Audit Strategy vs Audit Plan

Answer 3

Strategy is broad and about resources

Plan is more detailed and actual actions

Question 4

Related Parties

Answer 4

Affiliates of the enterprise

Question 5

Nature, Timing, and Extent

Answer 5

Nature: specific audit procedures to perform

Timing: when the audit procedures are performed (interim or year end)

Extent: amount of testing (sample sizes, how much substantive testing)

Question 6

Risk Assessment
Procedures

Answer 6

Audit procedures used to obtain an
understanding of the entity and its
environment, including its internal control.

Question 7

Tests of Controls

Answer 7

Audit procedures performed to test the effectiveness of controls in preventing or detecting and correcting material
misstatements

Question 8

Substantive
Procedures

Answer 8

Audit procedures performed to detect material misstatements in a transaction class, account balance, and disclosure component of the
financial statements.

Question 9

Tolerable Misstatement

Answer 9

Auditor sets a separate materiality for individual accounts.

It is set at an amount less than overall materiality.

A common benchmark is to
set tolerable materiality at 50-75% of overall materiality.

Question 10

Audit Risk

Answer 10

Risk the auditor mistakenly expresses a clean audit opinion when the
financial statements are materially misstated

Question 11

Auditors must consider audit risk at

Answer 11

The assertion level

Question 12

Inherent Risk

Answer 12

The probability that a material misstatement would occur in client’s financial statements before considering any controls (assumes no controls in place)

Question 13

Control Risk

Answer 13

The risk that a material misstatement will bypass controls or not be detected and corrected by controls on a timely basis (based on client’s internal control structure)

Question 14

Risk of Material Misstatement (RMM) =

Answer 14

IR x CR

Question 15

Detection Risk

Answer 15

The risk that audit procedures performed by an auditor
will not detect a material misstatement (either individual or in aggregate)

Question 16

Relationship between DR and IR/CR

Answer 16

Inverse

Question 17

Audit Risk =

Answer 17

IR x CR x DR or RMM x DR

Question 18

Risks order:

Answer 18

1. Audit Risk
2. Inherent Risk
3. Control Risk
4. Detection Risk

Question 19

Audit Risk Model Steps

Answer 19

1. Auditor Sets Audit Risk
2. Auditor assesses IR and CR
3. Auditor solves for DR

Question 20

Relationship between DR and testing

Answer 20

Inverse

Question 21

Relationship between RMM and testing

Answer 21

proportional

Question 22

Engagement Risk

Answer 22

The risk the auditor is exposed to financial loss or damage to his/her professional reputation from litigation, adverse publicity or
other events arising in connections with the audited financial statements

Question 23

Fraud Risk Triangle =

Answer 23

Incentive + Opportunity + Attitude

Question 24

Fraudulent financial reporting

Answer 24

intended to deceive
financial statement users

Question 25

Misappropriation of assets

Answer 25

theft of assets that cause financial statement misstatements

Question 26

Whenever auditor has found evidence of fraud, that matter should be brought to the attention of

Answer 26

Typically - at least one management level higher than the fraud Fraud involving senior management or material misstatement to the financial statements should be reported directly to the Audit Committee

Question 27

The higher the quality of evidence,

Answer 27

requires less audit evidence

Question 28

Nature, Timing, Extent

Answer 28

Nature- The type of test to perform, such as observation, confirmation, or reconciliation Timing- When to perform the test, such as interim or at year-end Extent- The amount of testing to perform, such as the number of samples or observations

Question 29

Occurence/Existence order

Answer 29

Vouch down. Start at ledger and go down to source document

Question 30

Completeness order

Answer 30

Trace up – start at source document and go up to ledger

Question 31

Highest Reliability Testing:

Answer 31

-Inspection of Tangible Assets -Reperformance -Recalculation

Question 32

Least Reliable Testing:

Answer 32

-Observation -Inquery

Question 33

Vertical Analysis

Answer 33

Involves the assessment of line items of a financial statement as a percentage of a specific base line item

Question 34

Horizontal Analysis

Answer 34

Compares historical data, which includes ratios and line items, over a series of accounting periods (month, quarter, year....)