Assessing Risk & Developing a Planned Response - 25-35%

Question 1

As a result of control testing, a CPA has decided to reduce control risk. What is the impact on substantive testing sample size if all other factors remain constant?

The sample size would be irrelevant.
The sample size would be higher.
The sample size would be lower.
The sample size would be unaffected.

Answer 1

The sample size would be lower.
Lowering the assessment of control risk would permit a somewhat higher level of detection risk. Taking a smaller sample size would be associated with a higher level of detection risk, which would be appropriate in view of the reduced control risk.

Question 2

The acceptable level of detection risk is inversely related to the

Answer 2

Assurance provided by substantive tests.
Detection risk is inversely related to the assurance provided by substantive tests. The lower the detection risk, the more assurance needed from substantive testing.

Question 3

Which of the following results of analytical procedures would most likely indicate possible unrecorded liabilities?

A. Current ratio of 2:1 as compared to 5:1 for the prior period.

B. Ratio of accounts payable to total current liabilities of 4:1, compared to 6:1 for the prior period.

C. Accounts payable turnover of 5, compared to 10 for the prior period.

D. Accounts payable balance increase greater than 10% over the prior period.

Answer 3

Ratio of accounts payable to total current liabilities of 4:1, compared to 6:1 for the prior period.

This ratio is A/P divided by total current liabilities. A decrease in this ratio (from 6:1 to 4:1) could be caused by an omission of current liabilities (other than A/P) resulting in the appearance that A/P is a larger proportion of total current liabilities than it should be.

Question 4

An Audit Data Analytic performed to obtain an understanding of the entity and its environment would best be described as a:

Answer 4

Risk assessment procedure.

Risk assessment procedures are primarily associated with obtaining an understanding of the entity and its environment for purposes of assessing the risks of material misstatement.

Question 5

In preparing the data to be used in an audit data analytic, the process of cleaning the data so that it can be analyzed is referred to as:

Answer 5

Data transformation.

Before data can be used in an audit data analytic it should be cleaned to ensure format consistency, blank fields are accurate, field types are correct, etc. The process of cleaning the data so that it can be analyzed is known as “transformation.”