Question

1-5

The following five questions relate independent events. Using the audit risk model as a guide, determine the effect the event has on risk or evidence collected.

1) The client’s management materially increased contractual debt. The effect this has on    control risk is

         A) decrease                                                         B) no effect

         C) cannot be determine                                     D) increase

2) The account balance increased materially from the preceding year without apparent reason. The effect this has is to

         A) increase inherent risk                                    B) decrease control risk

         C) decrease inherent risk                                    D) increase acceptable audit risk (AAR)

3) The client began selling products online to customers through its Web page during the year under audit. The online customer ordering process is not integrated with the company’s accounting system. Client sales staff print out customer order information and enter that data into the accounting system. Together, these facts will have which of the following effects.

A) Increase acceptable audit risk (AAR)

B) Increase inherent risk and crease control risk

C) increase inherent risk

D) Increase inherent risk and control risk

4) You determined through the planning phase that working capital, debt-to-equity ratio, and other indicators of financial condition had improved during the past year. This fact has which of the following effects

         A) decrease of evidence gathered                      B) decrease of acceptable audit risk

         C) decrease control risk                                      D) increase of evidence gathered

5) This is the second year of the engagement, and there were only a few misstatements found in the previous year’s audit. The auditor also decided to increase reliance on internal control. The effect these facts have on acceptable audit risk is

         A) decrease                                                         B) increase

         C) cannot determine                                          D) none

6) The auditor was reviewing the minutes of the Board of Directors meeting and found the     following Officer’s bonuses for the previous fiscal year were discussed and approved for payment in the amount of $250,000. The most important aspect of this information to the auditor is:

    A) the accrual of the bonus in the current year.

    B) the amount of the bonus

    C) the identity of the bonus recipients

    D) the accrual of the bonus in the previous year

7) Inherent risk is reduced where the likelihood of theft is low. This would be true for an    account such as

    A) Inventory                                                B) Cash

    C) large fixed assets                        D) marketable securities

Answer 1

1. Option B no effect

2.A increase inherent risk

3.D it will increase inherent risk and control risk

4. A decrease of evidence gathered.

5.D none because no change.

6.A the accrual of bonus in the previous year.

7. B - Cash inherent risk would be reduced if theft is low.