AA B Planning and risk assessment

Written by Fahad Mirza (ACCA)

ACCA · Audit and Assurance · 11 questions

Name: ____________________ Date: ____________

What are the components of audit risk?
- A Detection risk, reporting risk and legal risk
- B Inherent risk, control risk and detection risk
- C Inherent risk, business risk and fraud risk
- D Control risk, financial risk and tax risk
Target audit risk is 5 percent, inherent risk 80 percent and control risk 50 percent. What is the detection risk?
- A 2%
- B 12.5%
- C 20%
- D 40%
If the auditor assesses control risk as high, what happens to the extent of substantive procedures?
- A They are not needed
- B They are the same
- C They decrease
- D They increase
An auditor uses 5 percent of profit before tax as a benchmark. Profit before tax is $4,000,000. What is materiality?
- A $20,000
- B $80,000
- C $200,000
- D $400,000
What is performance materiality?
- A The highest amount the client can pay
- B The auditor's fee
- C An amount set below materiality to reduce the risk of undetected misstatements
- D The profit target
What does an engagement letter set out?
- A The audit opinion
- B The results of the audit
- C The terms of the engagement, including the scope and the responsibilities of directors and auditor
- D The tax position of the client
Which of these is one of the three conditions often present when fraud occurs?
- A Audit
- B Profit
- C Materiality
- D Opportunity
Who is primarily responsible for the prevention and detection of fraud?
- A The tax authority
- B Management and those charged with governance
- C The shareholders
- D The external auditor
What is the purpose of analytical procedures at the planning stage?
- A To count inventory
- B To prepare the tax return
- C To identify unusual relationships and areas of risk
- D To confirm the final opinion
What is professional scepticism?
- A Accepting management's explanations
- B Distrust of all clients
- C A questioning mind and critical assessment of audit evidence
- D Avoiding judgement
What does an audit plan contain?
- A The final report
- B The nature, timing and extent of audit procedures
- C The client's budget
- D The list of shareholders

Answer key

1. B, 2. B, 3. D, 4. C, 5. C, 6. C, 7. D, 8. B, 9. C, 10. C, 11. B

Audit risk = inherent risk x control risk x detection risk.
0.05 / (0.8 x 0.5) = 0.125.
Higher risk of misstatement needs lower detection risk.
5% x 4,000,000 = 200,000.
It takes account of uncorrected and undetected misstatements.
It is agreed before the audit starts.
The conditions are incentive or pressure, opportunity and rationalisation.
The auditor assesses the risk and plans procedures to detect material fraud.
They compare information with expectations.
It is a general principle of auditing.
It follows the overall audit strategy.