Risk

Question 1

Is the following scenario an increased/decreased audit risk? Is it a fraud risk factor?

BOD is controlled by the majority stockholder, also the CEO

Answer 1

Increased Audit Risk

Fraud Risk Factor

Question 2

Is the following scenario an increased/decreased audit risk? Is it a fraud risk factor?

Government Regulation

Answer 2

Decreased Audit Risk

Question 3

Is the following scenario an increased/decreased audit risk? Is it a fraud risk factor?

Steady Company Profitability

Answer 3

Decreased Audit Risk

Question 4

Is the following scenario an increased/decreased audit risk? Is it a fraud risk factor?

High Demand for the Company’s Product

Answer 4

Decreased Audit Risk

Question 5

Is the following scenario an increased/decreased audit risk? Is it a fraud risk factor?

High Volatility of Interest Rates, which greatly affects the company’s dealings

Answer 5

Increased Audit Risk

NOT a fraud risk factor because that is not an event or condition that indicates an incentive or pressure to perpetrate fraud, provide an opportunity to commit fraud, or indicates attitudes or rationalizations to justify a fraudulent action. Usually high volatility of interest rates can easily be dealt with in non-fraudulent ways (agreements are locked in).

Question 6

Is the following scenario an increased/decreased audit risk? Is it a fraud risk factor?

Involvement of Principal Shareholder in Management

Answer 6

Increased Audit Risk

Question 7

Is the following scenario an increased/decreased audit risk? Is it a fraud risk factor?

Accounting Department has low Turnover

Answer 7

Decreased Audit Risk

Question 8

Is the following scenario an increased/decreased audit risk? Is it a fraud risk factor?

Internal Audit reports to the chairman of the board’s audit committee

Answer 8

Decreased Audit Risk

Question 9

Is the following scenario an increased/decreased audit risk? Is it a fraud risk factor?

A firm has a continuing audit relationship with a client

Answer 9

Decreased Audit Risk

Question 10

Is the following scenario an increased/decreased audit risk? Is it a fraud risk factor?

New computer system

Answer 10

Increased Audit Risk

NOT a fraud risk factor because that is not an event or condition that indicates an incentive or pressure to perpetrate fraud, provide an opportunity to commit fraud, or indicates attitudes or rationalizations to justify a fraudulent action. Usually a new computer program will help the company, but it has risk because it may not be operating effectively

Question 11

Is the following scenario an increased/decreased audit risk?

Client changes its method of preparing its financial statements from the cash basis to generally accepted accounting principles

Answer 11

Increased Audit Risk

This is an unusual event that doesn’t happen very often, therefore the risk is higher

Question 12

Is the following scenario an increased/decreased audit risk?

Client sold one-half of its controlling interest but retained significant influence over them

Answer 12

Increased Audit Risk

This is an unusual transaction that doesn’t happen very often, therefore the risk is higher

Question 13

Is the following scenario an increased/decreased audit risk?

Litigation against a client was dropped

Answer 13

Decreased Audit Risk

No longer have to deal with loss contingency disclosures, a complicated transaction that can very easily be messed up.

Question 14

What is an auditor’s primary concern in assessing control risk?

Answer 14

The proper segregation of duties

Question 15

T/F

Analytical Procedures are part of the risk assessment procedures performed and therefore should be documented

Answer 15

FALSE

Although analytical procedures are required to be documented in the overall review phase they are not part of the documentation requirements for assessing risks.