ACCN 7110 EXAM 2 STUDY GUIDE
QUESTIONS AND ANSWERS GRADED A+
2026
Audit risk is best defined as what? - ANS 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 - ANS 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? -
ANS performance materiality
from a definitional perspective, information is considered material if what happens? - ANS 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? - ANS total assets and total
revenues
if auditors determine a higher planning materiality level, they will plan to gather __ extensive
audit evidence - ANS less
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
1
,the auditor can set detection risk as high if what happens? - ANS inherent risk and control
risk are both low
what is control risk? - ANS 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? -
ANS 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 - ANS 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? -
ANS audit strategy
developing an audit strategy is typically accomplished in what phase? - ANS 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? - ANS when the procedure will be
performed
the determination of when audit procedures will be performed is primarily dependent upon
what? - ANS the effectiveness of the client's controls
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
2
,substantive procedures are designed to do what? - ANS 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? - ANS assess RMM as high since both inherent risk and control risk are
high
the sufficiency of audit evidence refers to the ___ - ANS quantity of audit evidence gathered
the appropriateness of audit evidence refers to the ___ - ANS quality of audit evidence
gathered
the amount of evidence that an auditor must collect is a function of ___ - ANS 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 ___ - ANS analytical procedures
what provides evidence for the occurrence assertion? - ANS 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? - ANS observation
when an auditor asks questions verbally or in written form of knowledgeable individuals
internal to the client, this is referred to as what? - ANS 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
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
3
, c) all testing and evidence gathered in preparation of the audit report
d) debt covenants - ANS 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 - ANS 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? - ANS control environment
compensating controls are described as what? - ANS controls that compensate for another
control's potential ineffectiveness
an example of an entity level control would be what? - ANS an entity's risk assessment
process
physical controls are concerned with limiting what? - ANS 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 -
ANS transaction
key assertions pertaining to the audit of credit sales are what? - ANS 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? - ANS 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? - ANS a preventive control
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
4
QUESTIONS AND ANSWERS GRADED A+
2026
Audit risk is best defined as what? - ANS 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 - ANS 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? -
ANS performance materiality
from a definitional perspective, information is considered material if what happens? - ANS 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? - ANS total assets and total
revenues
if auditors determine a higher planning materiality level, they will plan to gather __ extensive
audit evidence - ANS less
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
1
,the auditor can set detection risk as high if what happens? - ANS inherent risk and control
risk are both low
what is control risk? - ANS 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? -
ANS 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 - ANS 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? -
ANS audit strategy
developing an audit strategy is typically accomplished in what phase? - ANS 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? - ANS when the procedure will be
performed
the determination of when audit procedures will be performed is primarily dependent upon
what? - ANS the effectiveness of the client's controls
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
2
,substantive procedures are designed to do what? - ANS 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? - ANS assess RMM as high since both inherent risk and control risk are
high
the sufficiency of audit evidence refers to the ___ - ANS quantity of audit evidence gathered
the appropriateness of audit evidence refers to the ___ - ANS quality of audit evidence
gathered
the amount of evidence that an auditor must collect is a function of ___ - ANS 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 ___ - ANS analytical procedures
what provides evidence for the occurrence assertion? - ANS 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? - ANS observation
when an auditor asks questions verbally or in written form of knowledgeable individuals
internal to the client, this is referred to as what? - ANS 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
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
3
, c) all testing and evidence gathered in preparation of the audit report
d) debt covenants - ANS 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 - ANS 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? - ANS control environment
compensating controls are described as what? - ANS controls that compensate for another
control's potential ineffectiveness
an example of an entity level control would be what? - ANS an entity's risk assessment
process
physical controls are concerned with limiting what? - ANS 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 -
ANS transaction
key assertions pertaining to the audit of credit sales are what? - ANS 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? - ANS 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? - ANS a preventive control
@COPYRIGHT 2026/2027 ALL RIGHTS RESERVED
4
