CPA Risk Assessment & Underwriting 3

Question 1

Which condition would most likely cause an auditor to assess control risk at the maximum level?

Accepted Answer

The entity lacks effective internal controls over a financial reporting process

Answer

When an entity lacks effective internal controls over a process, the auditor must assess control risk at maximum, requiring more extensive substantive testing.

Question 2

In insurance underwriting, 'facultative reinsurance' differs from 'treaty reinsurance' in that facultative reinsurance:

Accepted Answer

Is negotiated separately for each individual risk

Answer

Facultative reinsurance is negotiated on a case-by-case basis for individual risks, while treaty reinsurance covers an entire book or portfolio of business automatically.

Question 3

When performing risk assessment for a client with significant estimates, an auditor should:

Accepted Answer

Assess whether management has used reasonable assumptions and methods

Answer

The auditor must evaluate whether management's assumptions and methods for developing estimates are reasonable and consistent with applicable accounting standards.

Question 4

Which type of underwriting risk arises from the uncertainty in the frequency and severity of future insurance claims?

Accepted Answer

Insurance risk (underwriting risk)

Answer

Insurance risk (underwriting risk) is the core risk that insurers take on, arising from uncertainty about when losses will occur and how large they will be.

Question 5

Under PCAOB standards, an auditor's understanding of the company's risk assessment process should include:

Accepted Answer

How management identifies and responds to risks of material misstatement

Answer

Understanding the entity's risk assessment process includes learning how management identifies business risks, estimates their significance, and responds to them.

(CPA) Certified Practicing Accountant Practice Test

(CPA) Certified Practicing Accountant Practice Test

CPA Risk Assessment & Underwriting 3