ACCN 7110 EXAM 2 STUDY GUIDE QUESTIONS WITH CORRECT ANSWERS LATEST UPDATE 2026
audit risk is best defined as what? - Answers the risk that an auditor expresses inappropriate audit
opinion when the financial statements are materially misstated
misstatements that impact a user's decision-making process for a reason other than its magnitude
constitute __ materiality - Answers qualitative
what term is an amount set by the auditor that is used to make decisions about the extent of audit
procedures for a particular class of transaction, account balance, or disclosure? - Answers
performance materiality
from a definitional perspective, information is considered material if what happens? - Answers it
impacts the decision-making process of users of the financial statements
in addition to income before income taxes, another common benchmark(s) for determining planning
materiality for private company audits is(are) what? - Answers total assets and total revenues
if auditors determine a higher planning materiality level, they will plan to gather __ extensive audit
evidence - Answers less
the auditor can set detection risk as high if what happens? - Answers inherent risk and control risk are
both low
what is control risk? - Answers the risk that a client's internal controls will not prevent or detect a
material misstatement on a timely basis
in a financial statement audit, inherent risk is evaluated to help an auditor assess what? - Answers the
susceptibility of a financial statement assertion to a material misstatement assuming there are no
related controls
which of the following is an example of fraudulent financial reporting?
a) the treasurer diverts customer payments to his personal use, concealing his actions by debiting an
expense account, this overstating expenses
b) an employee steals inventory and the "shrinkage" is recorded in cost of goods sold
c) company management improperly records as revenue the proceeds of a loan
d) an employee bills his company for products not received, using the name of a fictitious supplier -
Answers c) company management improperly records as revenue the proceeds of a loan
what term refers to the determination of the amount of time to spend testing the client's internal
controls and conducting detailed testing of transactions and account balances? - Answers audit
strategy
developing an audit strategy is typically accomplished in what phase? - Answers planning --> risk
assessment phase
an audit plan details the nature, extent, and timing of audit procedures to be performed. the "timing"
of audit procedures is best defined as what? - Answers when the procedure will be performed
the determination of when audit procedures will be performed is primarily dependent upon what? -
Answers the effectiveness of the client's controls
substantive procedures are designed to do what? - Answers detect material misstatement at the
assertion level
in the substantive approach, if there is no internal control in place and inherent risk is high, the
auditors do what? - Answers assess RMM as high since both inherent risk and control risk are high
the sufficiency of audit evidence refers to the ___ - Answers quantity of audit evidence gathered
the appropriateness of audit evidence refers to the ___ - Answers quality of audit evidence gathered
the amount of evidence that an auditor must collect is a function of ___ - Answers the risk of material
misstatement in a relevant assertion for an account balance class of transactions
an auditors' evaluation of financial information by studying plausible relationships among both
financial and non-financial data is referred to as ___ - Answers analytical procedures
what provides evidence for the occurrence assertion? - Answers vouching
a common audit procedure that involves watching a process or procedure being carried out by client
personnel or another party is known as what? - Answers observation
when an auditor asks questions verbally or in written form of knowledgeable individuals internal to
the client, this is referred to as what? - Answers inquiry
which of the following are included in the permanent file and not in the current file?
a) correspondence with other auditors and specialists
b) extracts from the minutes of meetings
c) all testing and evidence gathered in preparation of the audit report
, d) debt covenants - Answers d) debt covenants
true or false: an integrated audit refers to the audit of the financial statements as well as the system
of internal control - Answers true
one of the 17 COSO principles of internal control states that "the organization holds individual
accountable for their internal control responsibilities in the pursuit of objectives." to which
component of internal control does this principle belong? - Answers control environment
compensating controls are described as what? - Answers controls that compensate for another
control's potential ineffectiveness
an example of an entity level control would be what? - Answers an entity's risk assessment process
physical controls are concerned with limiting what? - Answers physical access to assets to those
authorized to have access
a control ensuring that sales are recorded in the sales ledger is a/an ____-level control - Answers
transaction
key assertions pertaining to the audit of credit sales are what? - Answers accuracy and occurrence
when the computer system checks the validity of a customer number or whether a customer has
reached their credit limit is an example of what control? - Answers computer application control
a software application will not allow a sale to be processed if a customer is over its credit limit. this is
an example of what? - Answers a preventive control
an auditor uses the knowledge provided by the understanding of internal control and the assessed
level of the risks of material misstatement primarily to do what? - Answers determine the nature,
timing, and further audit procedures
when an auditor increases the assessed level of control risk because certain control activities were
determined to be ineffective, the auditor will most likely increase what? - Answers extent of tests of
details
what is an example of a test of controls procedure? - Answers an auditor interviews and observes
appropriate personnel to determine segregation of duties
in what phase of the audit does the audit risk model occur? - Answers planning phase --> risk
assessment
what do we need to consider with audit risk and materiality? - Answers how they affect the nature,
timing, and extent of audit procedures
what are the two main steps of assessing the risk of material misstatement? - Answers determine
where misstatements are most likely to occur in the financial statements
determine what amount of misstatement would be "material" to a user of the financial statements
why are the two steps of assessing the risk of material misstatement important to the auditor? -
Answers helps the auditor determine where to focus their time and energy
what is the audit risk model "equation"? - Answers AR = IR x CR x DR
what is audit risk? - Answers the risk that the auditor expresses and inappropriate audit opinion
where the financial statements are materially misstated (i.e., the financial statements are not
presented fairly in conformity with the applicable financial reporting framework
what is inherent risk? - Answers the susceptibility of an assertion to a misstatement, due to error or
fraud, that could be material, individually or in combination with the other misstatements, before
consideration of any related controls
what is control risk (general definition)? - Answers the risk that a misstatement due to error or fraud
that could occur in an assertion and that could be material, individually or in combination with other
misstatements, will not be prevented or detected on a timely basis by the company's internal control
what makes up Risk of Material Misstatement (RMM)? - Answers inherent risk and control risk
what is detection risk? - Answers the risk that the procedures performed by the auditor will not
detect a misstatement that exists and that could be material, individually or in combination with
other misstatements
what are the overall goals of a financial statement audit? - Answers to provide reasonable assurance
regarding whether the financial statements are free from material misstatement
what does the auditor need to do to provide reasonable assurance for a financial statement audit? -
Answers reduce audit risk to an acceptable level
what are the factors affecting acceptable audit risk? - Answers auditor may decide to modify
acceptable audit risk based on their assessment of engagement risk: firm size, distribution of
ownership, nature/amount of liabilities
what is engagement risk? - Answers the degree to which external users rely on the statements
audit risk is best defined as what? - Answers the risk that an auditor expresses inappropriate audit
opinion when the financial statements are materially misstated
misstatements that impact a user's decision-making process for a reason other than its magnitude
constitute __ materiality - Answers qualitative
what term is an amount set by the auditor that is used to make decisions about the extent of audit
procedures for a particular class of transaction, account balance, or disclosure? - Answers
performance materiality
from a definitional perspective, information is considered material if what happens? - Answers it
impacts the decision-making process of users of the financial statements
in addition to income before income taxes, another common benchmark(s) for determining planning
materiality for private company audits is(are) what? - Answers total assets and total revenues
if auditors determine a higher planning materiality level, they will plan to gather __ extensive audit
evidence - Answers less
the auditor can set detection risk as high if what happens? - Answers inherent risk and control risk are
both low
what is control risk? - Answers the risk that a client's internal controls will not prevent or detect a
material misstatement on a timely basis
in a financial statement audit, inherent risk is evaluated to help an auditor assess what? - Answers the
susceptibility of a financial statement assertion to a material misstatement assuming there are no
related controls
which of the following is an example of fraudulent financial reporting?
a) the treasurer diverts customer payments to his personal use, concealing his actions by debiting an
expense account, this overstating expenses
b) an employee steals inventory and the "shrinkage" is recorded in cost of goods sold
c) company management improperly records as revenue the proceeds of a loan
d) an employee bills his company for products not received, using the name of a fictitious supplier -
Answers c) company management improperly records as revenue the proceeds of a loan
what term refers to the determination of the amount of time to spend testing the client's internal
controls and conducting detailed testing of transactions and account balances? - Answers audit
strategy
developing an audit strategy is typically accomplished in what phase? - Answers planning --> risk
assessment phase
an audit plan details the nature, extent, and timing of audit procedures to be performed. the "timing"
of audit procedures is best defined as what? - Answers when the procedure will be performed
the determination of when audit procedures will be performed is primarily dependent upon what? -
Answers the effectiveness of the client's controls
substantive procedures are designed to do what? - Answers detect material misstatement at the
assertion level
in the substantive approach, if there is no internal control in place and inherent risk is high, the
auditors do what? - Answers assess RMM as high since both inherent risk and control risk are high
the sufficiency of audit evidence refers to the ___ - Answers quantity of audit evidence gathered
the appropriateness of audit evidence refers to the ___ - Answers quality of audit evidence gathered
the amount of evidence that an auditor must collect is a function of ___ - Answers the risk of material
misstatement in a relevant assertion for an account balance class of transactions
an auditors' evaluation of financial information by studying plausible relationships among both
financial and non-financial data is referred to as ___ - Answers analytical procedures
what provides evidence for the occurrence assertion? - Answers vouching
a common audit procedure that involves watching a process or procedure being carried out by client
personnel or another party is known as what? - Answers observation
when an auditor asks questions verbally or in written form of knowledgeable individuals internal to
the client, this is referred to as what? - Answers inquiry
which of the following are included in the permanent file and not in the current file?
a) correspondence with other auditors and specialists
b) extracts from the minutes of meetings
c) all testing and evidence gathered in preparation of the audit report
, d) debt covenants - Answers d) debt covenants
true or false: an integrated audit refers to the audit of the financial statements as well as the system
of internal control - Answers true
one of the 17 COSO principles of internal control states that "the organization holds individual
accountable for their internal control responsibilities in the pursuit of objectives." to which
component of internal control does this principle belong? - Answers control environment
compensating controls are described as what? - Answers controls that compensate for another
control's potential ineffectiveness
an example of an entity level control would be what? - Answers an entity's risk assessment process
physical controls are concerned with limiting what? - Answers physical access to assets to those
authorized to have access
a control ensuring that sales are recorded in the sales ledger is a/an ____-level control - Answers
transaction
key assertions pertaining to the audit of credit sales are what? - Answers accuracy and occurrence
when the computer system checks the validity of a customer number or whether a customer has
reached their credit limit is an example of what control? - Answers computer application control
a software application will not allow a sale to be processed if a customer is over its credit limit. this is
an example of what? - Answers a preventive control
an auditor uses the knowledge provided by the understanding of internal control and the assessed
level of the risks of material misstatement primarily to do what? - Answers determine the nature,
timing, and further audit procedures
when an auditor increases the assessed level of control risk because certain control activities were
determined to be ineffective, the auditor will most likely increase what? - Answers extent of tests of
details
what is an example of a test of controls procedure? - Answers an auditor interviews and observes
appropriate personnel to determine segregation of duties
in what phase of the audit does the audit risk model occur? - Answers planning phase --> risk
assessment
what do we need to consider with audit risk and materiality? - Answers how they affect the nature,
timing, and extent of audit procedures
what are the two main steps of assessing the risk of material misstatement? - Answers determine
where misstatements are most likely to occur in the financial statements
determine what amount of misstatement would be "material" to a user of the financial statements
why are the two steps of assessing the risk of material misstatement important to the auditor? -
Answers helps the auditor determine where to focus their time and energy
what is the audit risk model "equation"? - Answers AR = IR x CR x DR
what is audit risk? - Answers the risk that the auditor expresses and inappropriate audit opinion
where the financial statements are materially misstated (i.e., the financial statements are not
presented fairly in conformity with the applicable financial reporting framework
what is inherent risk? - Answers the susceptibility of an assertion to a misstatement, due to error or
fraud, that could be material, individually or in combination with the other misstatements, before
consideration of any related controls
what is control risk (general definition)? - Answers the risk that a misstatement due to error or fraud
that could occur in an assertion and that could be material, individually or in combination with other
misstatements, will not be prevented or detected on a timely basis by the company's internal control
what makes up Risk of Material Misstatement (RMM)? - Answers inherent risk and control risk
what is detection risk? - Answers the risk that the procedures performed by the auditor will not
detect a misstatement that exists and that could be material, individually or in combination with
other misstatements
what are the overall goals of a financial statement audit? - Answers to provide reasonable assurance
regarding whether the financial statements are free from material misstatement
what does the auditor need to do to provide reasonable assurance for a financial statement audit? -
Answers reduce audit risk to an acceptable level
what are the factors affecting acceptable audit risk? - Answers auditor may decide to modify
acceptable audit risk based on their assessment of engagement risk: firm size, distribution of
ownership, nature/amount of liabilities
what is engagement risk? - Answers the degree to which external users rely on the statements
