1.

Inherent risk differs from detection risk in that inherent risk:

A) Arises from the misapplication of auditing procedures
B) May be assessed in either quantitative or non-quantitative terms
C) Exists independently of the financial report audit
D) Can be changed at the auditor's discretion

2 .Which of the following would not increase inherent risk?

A) Introduction of a performance-based management compensation scheme to improve
efficiency and effectiveness
B) Appointing the managing director's daughter to a vacant position on the board of
directors
C) To improve speed of processing, the entity ceases approval of invoices prior to
payment
D) The entity decides to enter the Internet market because of the high share prices being
achieved by Internet companies
3. Inherent risk will:
A) Always be set at the same level as audit risk
B) Will be assessed after control risk is assessed
C) Have a direct effect on the level of audit work completed
D) Never be 100 per cent
4. Which of the following would increase inherent risk?
A) Disputes between management and the previous auditor
B) Poor controls over inventory
C) Lack of training of the audit staff
D) All of the above
5. Which of the following would increase inherent risk?
A) All key operating decisions are approved by the audit committee
B) The appointment of a very successful mining CEO to head the new retail division
C) The suspension of a management compensation scheme for executives that was
based on the company's share price
D) None of the above
6. Which of the following characteristics would most likely increase an auditor's concern
about the inherent risk of intentional manipulation of the financial report?
A) Low turnover of senior accounting personnel
B) Lack of controls over the purchasing function
C) Substantial emphasis placed on management to meet earnings projections
D) Slow rate of change in the entity's industry
7 . Which of the following characteristics is most likely to result in the auditor assessing
inherent risk at the financial report level as high?

A) Management has introduced a new code of ethical conduct for all executives and
employees
B) The company is involved in the grape-growing industry
C) There is strong growth in the economy
D) The entity undertakes extensive training of its computer staff

8. Which of the following events would result in an increase in inherent risk?

A) The entity stops checking the actual goods delivered against the supplier's delivery
docket
B) The entity ceases its export sales
C) The entity sacks and does not replace its IT manager
D) There is a reduction in interest rates

9. Which of the following would reduce inherent risk?

A) Conversion of the accounting system to the latest version of the accounting package
B) Hedging foreign currency exposure
C) Positive management support for resolving IT issues
D) All of the above
10. Which of the following characteristics is most likely to result in the auditor assessing
inherent risk as low at the account balance, class of transaction and disclosure level?
A) The entity has very good controls over its foreign currency purchases
B) No material errors were discovered last year in the audit of the purchases cycle
C) The entity uses finance leases rather than purchasing plant and equipment
D) The entity purchases all its gemstones from reputable dealers within Australia

11. Which of the following accounts would have the lowest inherent risk?
A) Computer software development costs
B) Depreciation expense
C) Doubtful debts
D) Income tax expense

12. An auditor is currently involved in the audit of inventory for Tiffany Jewellers, a
large jewellery store specialising in the sale of diamond chips and diamond jewellery. In
determining the audit approach for the existence assertion, the auditor would most likely
assess inherent risk as:
A) Medium
B) High
C) Low
D) 10 per cent

13. Which of the following factors would indicate that there is a higher possibility of a
fraud occurring for a client?
A) An audit committee is introduced
B) There is no segregation of duties
C) The entity is involved in a high-technology industry
D) There are no related parties

14 . In auditing, a red flag is:

A) An indicator that there is a possibility of fraud occurring within the entity
B) A mark which the auditor makes on documents to indicate they have been checked
C) A tag which the client uses to mark documents for the auditor's inspection
D) None of the above

15. Which of the following characteristics would most likely increase the auditor's
concern about the risk of material fraud in an entity's financial report?
A) The entity's industry is experiencing declining customer demand
B) Employees who handle cash are not covered by loss of profits or fidelity insurance
C) Bank reconciliations include unpresented cheques
D) Equipment is often sold at a loss before being fully depreciated