Multiple Choice Questions
The following questions concern audit risk. Choose the best response.
a. Some account balances, such as those for pensions and leases, are the result of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as
(1) Audit risk.
(2) Detection risk.
(3) Sampling risk.
(4) Inherent risk.
b. Inherent risk and control risk differ from planned detection risk in that they
(1) Arise from the misapplication of auditing procedures.
(2) May be assessed in either quantitative or nonquantitative terms.
(3) Exist independently of the financial statement audit.
(4) Can be changed at the auditor's discretion.
c. Which of the following best describes the element of inherent risk that underlies the application of auditing standards?
(1) Cash audit work may have to be carried out in a more conclusive manner than inventory audit work.
(2) Intercompany transactions are usually subject to less detailed scrutiny than arm’s length transactions with outside parties.
(3) Inventories may require more attention by the auditor on an engagement for a merchandising enterprise than on an engagement for a public utility.
(4) The scope of the audit need not be expanded if misstatements that arouse suspicion of fraud are of relatively insignificant amounts.