Month: September 2025

Audit risk can be split into three components: inherent risk, control risk and detection risk.

For each of the following examples, select the type of risk illustrated.

The organisation is seeking to raise finance for a new venture…..?

Select ONE answer:

1. Inherent
2. Control
3. Detection
4. No Risk

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 1

1. Correct == > The fact the organisation is seeking to raise finance for a new venture represents a risk at the company level that could increase the susceptibility of the accounts to material fraud and error.
2. Not correct
3. Not correct
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.

For each of the following statements about materiality, select whether they are true or false.

Statement 1 – Materiality may depend on the size of the error in the context of its omission or misstatement.

Statement 2 – Materiality should be considered when planning audit procedures and when evaluating discovered misstatements.

Statement 3 – Materiality is always expressed as a proportion of profits.

Identify whether the statements made above are true or false?

Select ONE answer:

1. Statement 1. True and Statement 2. False and Statement 3. False
2. Statement 1. False and Statement 2. False and Statement 3. True
3. Statement 1. True and Statement 2. True and Statement 3. False
4. Statement 1. False and Statement 2. True and Statement 3. True

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 3

1. Not correct
2. Not correct
3. Correct == > Statement 1 is True as the concept of materiality does not exist in a void, but depends on the context of the omission or misstatement. Statement 2 is True as materiality acts as a form of guidance in the amount of work required to be performed, and so when planning audit procedures — > It is also referred to in evaluating discovered misstatements (both individual misstatements and in aggregate). Statement 3 is False as materiality is not a fixed percentage of profits or other measure but depends on the audit risks faced for the particular client — > Further, materiality is not only measured quantitatively but also qualitatively.
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.

Tick and Co LLP, an audit and assurance firm, has the following factors to evaluate for a prospective client and decide whether it is high or low risk.

For each factor, select whether the inherent audit risk is high or low.

Factor 1 – The company operates a profit-related pay scheme.

Factor 2 – The business of the company is cash-based.

Factor 3 – Financial statements contain balances with straightforward financial accounting requirements.

Are these clients high or low risk?

Select ONE answer:

1. Factor 1 – Low and Factor 2 – Low and Factor 3 – Low
2. Factor 1 – High and Factor 2 – High and Factor 3 – Low
3. Factor 1 – Low and Factor 2 – Low and Factor 3 – High
4. Factor 1 – High and Factor 2 – High and Factor 3 – High

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 2

1. Not correct
2. Correct == > A profit-related scheme means that directors have the incentive to overstate profit and hence the accounts are susceptible to material fraud/error — > Therefore inherent risk is higher than normal. A cash-based business is more inherently risky than a non-cash-based business, as cash is susceptible by its nature to theft and omission. Where balances in the financial statements have straight-forward financial accounting requirements, the susceptibility to material error or misinterpretation is reduced.
3. Not correct
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.

Which ONE of the following would NOT normally be included in the overall audit strategy?

Select ONE answer:

1. Details of economic factors and industry conditions
2. The results of initial analytical procedures
3. Confirmation of management’s responsibility for the financial statements
4. Identification of specific audit risks

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 3

1. Not correct
2. Not correct
3. Correct == >    Confirmation of management’s responsibility for the financial statements is contained in the letter of engagement.
4. Not correct

This work is licensed under a Creative Commons Attribution 4.0 International License.

Which ONE of the following are auditors not helped by in setting a preliminary materiality threshold?

Select ONE answer:

1. How many items to examine
2. Whether to use sampling
3. What level of misstatement is likely to lead to the auditor not being able to give an unmodified opinion
4. What audit staff should be assigned to the audit

Show your workings to arrive at your answer, and explain and justify your reasons:

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………

This multiple-choice question is suitable for Accounting KS5 classes.

The answer is 4

1. Not correct
2. Not correct
3. Not correct
4. Correct == > What audit staff to assign to the audit would depend more on the risks associated with the engagement than the level of materiality.

This work is licensed under a Creative Commons Attribution 4.0 International License.