AA B Planning and risk assessment

What are the components of audit risk?

• 1 Detection risk, reporting risk and legal risk
• 2 Inherent risk, control risk and detection risk
• 3 Inherent risk, business risk and fraud risk
• 4 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?

• 1 2%
• 2 12.5%
• 3 20%
• 4 40%

If the auditor assesses control risk as high, what happens to the extent of substantive procedures?

• 1 They are not needed
• 2 They are the same
• 3 They decrease
• 4 They increase

An auditor uses 5 percent of profit before tax as a benchmark. Profit before tax is $4,000,000. What is materiality?

• 1 $20,000
• 2 $80,000
• 3 $200,000
• 4 $400,000

What is performance materiality?

• 1 The highest amount the client can pay
• 2 The auditor's fee
• 3 An amount set below materiality to reduce the risk of undetected misstatements
• 4 The profit target

What does an engagement letter set out?

• 1 The audit opinion
• 2 The results of the audit
• 3 The terms of the engagement, including the scope and the responsibilities of directors and auditor
• 4 The tax position of the client

Which of these is one of the three conditions often present when fraud occurs?

• 1 Audit
• 2 Profit
• 3 Materiality
• 4 Opportunity

Who is primarily responsible for the prevention and detection of fraud?

• 1 The tax authority
• 2 Management and those charged with governance
• 3 The shareholders
• 4 The external auditor

What is the purpose of analytical procedures at the planning stage?

• 1 To count inventory
• 2 To prepare the tax return
• 3 To identify unusual relationships and areas of risk
• 4 To confirm the final opinion

What is professional scepticism?

• 1 Accepting management's explanations
• 2 Distrust of all clients
• 3 A questioning mind and critical assessment of audit evidence
• 4 Avoiding judgement

What does an audit plan contain?

• 1 The final report
• 2 The nature, timing and extent of audit procedures
• 3 The client's budget
• 4 The list of shareholders