ACCA · Advanced Audit and Assurance (AAA)

Planning, materiality and assessing the risk of material misstatement: Practice Questions

5 multiple-choice questions marked as you go, and 5 written questions with worked solutions. All on Planning, materiality and assessing the risk of material misstatement.

10 questions21 marksFree, no account

Question 1

1 mark

Which of the following describes control risk?

Question 2

1 mark

During the planning phase, an auditor performs analytical procedures and notes that the inventory turnover ratio has significantly decreased compared to the prior year. Which risk of material misstatement is most likely identified by this finding?

Question 3

1 mark

The risk of material misstatement (RMM) is composed of which two risks?

Question 4

1 mark

Which factor would most likely lead to an increase in inherent risk at the assertion level for a specific account?

Question 5

1 mark

Which of the following is an example of an inherent risk factor?

Question 6

2 marks

Briefly explain the primary objective of setting performance materiality at a level lower than overall materiality for the financial statements as a whole.

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Question 7

4 marks

Using the audit risk model formula, where audit risk (\( AR \)) is a product of inherent risk (\( IR \)), control risk (\( CR \)), and detection risk (\( DR \)), explain how the auditor manages \( DR \) when \( IR \) and \( CR \) are assessed as high.

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Question 8

2 marks

Define detection risk in the context of an external audit.

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Question 9

3 marks

List three common benchmarks used by auditors to determine materiality and provide a brief example of a type of entity where each benchmark would be most appropriate (e.g., profit-oriented vs. non-profit entities).

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Question 10

5 marks

Beta Co has recently implemented a new automated inventory system. During the planning phase, the auditor learns that the system had technical glitches during the year-end transition, potentially affecting the valuation and existence of inventory.
(a) Analyze the risks of material misstatement at the assertion level for inventory.
(b) Describe the specific audit procedures that should be planned to respond to this risk.

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