hitechpathshala

Q. 1

SA 315 establishes requirements and provides guidance on identifying and assessing the risks of material misstatement -

at the financial statement levels only.

at the assertion levels only.

at the financial statement and assertion levels.

at the financial statement or assertion levels.

Q. 2

The risks of material misstatement at the assertion level consist of two components:

Inherent risk and detection risk

Control risk and detection risk

audit risk and detection risk

Inherent risk and controlrisk

Q. 3

Which of the following is correct:

When the projected misstatement exceeds tolerable misstatement, the sample does not provide a reasonable basis for conclusions about the population that has been tested.

When the projected misstatement plus anomalous misstatement, if any, exceeds tolerable misstatement, the sample does not provide a reasonable basis for conclusions about the population that has beentested.

When the anomalous misstatement exceeds tolerable misstatement, the sample does not provide a reasonable basis for conclusions about the population that has been tested.

When the projected misstatement plus anomalous misstatement, if any, exceeds tolerable misstatement, the sample provides a reasonable basis for conclusions about the population that has been tested.

Q. 4

Which of the following is correct:

The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from material misstatement due to fraud or error.

The auditor is expected to and can reduce audit risk to zero and can therefore obtain absolute assurance.

The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain reasonable assurance that the financial statements are free from material misstatement due to fraud or error.

The auditor is expected to and can reduce audit risk to zero and can therefore obtain reasonable assurance that the financial statements are free from material misstatement due to fraud or error.

Q. 5

Audit risk is a function of the

risks of material misstatement and detection risk.

audit risk and detection risk

control risk and detection risk.

inherent risk and detection risk.

Q. 6

. ________refers to a difference between the amount, classification, presentation, or disclosure of a reported financial statement item and the amount, classification, presentation, or disclosure that is required for the item to be in accordance with the applicable financial reporting framework.

Misstatement

Error

Fraud

Any of the above

Q. 7

One of your junior audit team members is confused with the term ‘material misstatement’. You explain him that a material misstatement is untrue information in a financial statement that could affect the financial decisions of one who relies on the statement. Which of the following would constitute material misstatement?

(1) An error of Rs.5,000 in relation to assets of Rs.20 lakhs.

(2) A payroll fraud of Rs.100 in a company where profit before tax is Rs.11,000.

(3) Non-disclosure of a material uncertainty.

(4) Financial statements have been prepared on a going concern basis when the company is in the process of being liquidated.

1 and2

3 and4

2 and3

1 and4

Q. 8

The assessment of the risks of material misstatement may be expressed in

quantitative terms, such as in percentages, or in non-quantitative terms.

quantitative terms, such as in percentages,

non-quantitative terms.

None of theabove

Q. 9

The risk that the financial statements are materially misstated prior to audit is called-

Risk of material misstatement

detection risk

audit risk

significant risk

Q. 10

Risk of material misstatement may be defined as the risk

that the financial statements are materially misstated after audit

that the financial statements are materially misstated during audit.

that the financial statements are materially misstated prior to audit

All of the above

Q. 11

Owing to the _______ limitations of an audit, there is risk that some material misstatements of the financial statements will not be detected, even though the audit is properly planned and performed in accordance with the SAs.

Inherent, unavoidable

Inherit, complete

Management, unavoidable

Regulatory, control

Q. 12

A company is engaged in manufacturing of wooden furniture. The auditor of company notes that company has identified emerging risks pertaining to probable reduction in demand of company’s products due to procurement of imported furniture from South East Asian nations. It has also estimated how significant are those risks and their possibility of happening. Besides, it has also formulated an action plan to deal with the situation, in case these risks materialize. Which of the following options would be most appropriate to describe above situation?

An example of audit risk for auditor

An example of component of internal control of company

An example of control risk of company

An example of inherent risk for auditor

Q. 13

Which of the following is incorrect For the purpose of Identifying and assessing the risks of material misstatement, the auditor shall :

Identify risks throughout the process of obtaining an understanding of the entity and its environment, including relevant controls that relate to the risks, and by considering the classes of transactions, account balances, and disclosures in the financial statements;

Assess the identified risks, and evaluate whether they relate more pervasively to the financial statements as a whole and potentially affect many assertions;

Relate the identified risks to what can go wrong at the assertion level, taking account of relevant controls that the auditor intends to test; and

Not consider the likelihood of misstatement, including the possibility of multiple misstatements, and whether the potential misstatement is of a magnitude that could result in a material misstatement.

Q. 14

To evaluate the Internal Control of Kingsway Limited, a team member of the auditors used a method according to which, number of questions relating to internal control of the company were required to be answered by the employees of the company. After obtaining the answers there was a discussion relating to those answers between team member of the auditor and employees of the company for a clear picture. State the method of evaluation of internal control as discussed above.

Narrative record

Check List

Internal Control questionnaire

Flow chart

Q. 15

The term Internal Financial Controls (IFC) basically refers to the policies and procedures put in place by companies for ensuring:

(i) Reliability of financial reporting

(ii) Compliance with applicable laws and regulations

(iii) Safeguarding of assets.

(iv) Effectiveness and efficiency of operations

(v) Prevention and detection of frauds

Which statement is correct?

(i),(ii)and (iv)

(i),(iii) (v) and(ii)

(i),(ii),(iii) and (iv)

(i), (ii),(iii),(iv)and (v)

CH- 3 RISK ASSESSMENT AND INTERNAL CONTROL

Marks: 15