CPA Risk Assessment & Underwriting 2

Question 1

Under AU-C Section 315, which of the following is an example of an entity-level control relevant to risk assessment?

Accepted Answer

Management's commitment to competence and ethical values

Answer

Entity-level controls include the control environment elements such as management's commitment to competence and ethical values, which pervasively affect all other controls.

Question 2

Which risk assessment procedure involves the auditor making observations about whether reconciliations are actually being performed?

Accepted Answer

Observation

Answer

Observation involves the auditor watching a process or procedure being performed, such as observing staff performing reconciliations.

Question 3

In insurance underwriting, 'adverse selection' refers to:

Accepted Answer

Higher-risk individuals being more likely to seek insurance coverage

Answer

Adverse selection occurs when people with higher risk are disproportionately likely to purchase insurance, leading to an imbalanced risk pool.

Question 4

A CPA auditing an insurance company's underwriting files would use 'loss ratio' primarily as:

Accepted Answer

A key performance metric comparing incurred losses to earned premiums

Answer

The loss ratio equals incurred losses divided by earned premiums and is the primary metric for evaluating underwriting profitability.

Question 5

When assessing inherent risk at the assertion level, which factor is most relevant for a technology company's software revenue recognition?

Accepted Answer

Complexity of multi-element software arrangements

Answer

Complex multi-element software arrangements create high inherent risk for revenue recognition because allocating transaction prices among performance obligations requires significant judgment.

(CPA) Certified Practicing Accountant Practice Test

(CPA) Certified Practicing Accountant Practice Test

CPA Risk Assessment & Underwriting 2