ACC 406 MIDTERM 1 EXAM QUESTIONS WITH
CORRECT ANSWERS 2026
Client acceptance/continuance - CORRECT ANSWER -Step 1 of audit - audit firms have to
confirm they are working with clients that have integrity. If taking on a new client, auditors
confer with predecessors
Preliminary engagement activities - CORRECT ANSWER -step 2 of audit - includes determining
audit engagement team requirements, ensuring audit firm/team independence, & establishing
an understanding with client about scope and terms of the audit
Plan the audit - CORRECT ANSWER -step 3 of audit - make preliminary assessment of client's
business risks and determine materiality, and determine audit risk
Consider and audit internal controls - CORRECT ANSWER -step 4 of audit - audit examines
internal controls to help identify risk
Audit business procedures and related accounts - CORRECT ANSWER -step 5 of audit - organize
accounts by business processes and perform audit tests
Complete the audit - CORRECT ANSWER -step 6 of audit - assess evidence and obtain additional
evidence where needed, check other issues (lawsuits, undisclosed liabilities, etc)
Evaluate results and issue audit report - CORRECT ANSWER -step 7 of audit - choose appropriate
audit opinion to report
Materiality - CORRECT ANSWER -whether an item is large enough to likely influence the decision
of an investor or creditor (user)
, Tolerable misstatement - CORRECT ANSWER -the amount of planning materiality that is
allocated to a financial statement account (based on risk and impact of account)
Audit risk - CORRECT ANSWER -The risk that the auditor expresses an inappropriate audit
opinion when the financial statements are materially misstated.
Inherent risk - CORRECT ANSWER -the susceptibility of an assertion to a misstatement due to
error or fraud before consideration of any related controls
Control risk - CORRECT ANSWER -risk that a material misstatement will not be caught by the
internal controls
Detection risk - CORRECT ANSWER -risk that the audit procedures performed will not catch a
material misstatement
AR = IR * CR * DR - CORRECT ANSWER -audit risk is composed of the inherent, control, and
detection risks
AR = RMM x DR - CORRECT ANSWER -audit risk is the risk of material misstatement (entity risk)
times the detection risk
Steps of using audit risk model - CORRECT ANSWER -1. Setting planned level of audit risk
2. Assessing RMM
3. Determine appropriate level of DR
DR = AR/RMM - CORRECT ANSWER -detection risk is determined by finding planned level of
audit risk over the RMM
CORRECT ANSWERS 2026
Client acceptance/continuance - CORRECT ANSWER -Step 1 of audit - audit firms have to
confirm they are working with clients that have integrity. If taking on a new client, auditors
confer with predecessors
Preliminary engagement activities - CORRECT ANSWER -step 2 of audit - includes determining
audit engagement team requirements, ensuring audit firm/team independence, & establishing
an understanding with client about scope and terms of the audit
Plan the audit - CORRECT ANSWER -step 3 of audit - make preliminary assessment of client's
business risks and determine materiality, and determine audit risk
Consider and audit internal controls - CORRECT ANSWER -step 4 of audit - audit examines
internal controls to help identify risk
Audit business procedures and related accounts - CORRECT ANSWER -step 5 of audit - organize
accounts by business processes and perform audit tests
Complete the audit - CORRECT ANSWER -step 6 of audit - assess evidence and obtain additional
evidence where needed, check other issues (lawsuits, undisclosed liabilities, etc)
Evaluate results and issue audit report - CORRECT ANSWER -step 7 of audit - choose appropriate
audit opinion to report
Materiality - CORRECT ANSWER -whether an item is large enough to likely influence the decision
of an investor or creditor (user)
, Tolerable misstatement - CORRECT ANSWER -the amount of planning materiality that is
allocated to a financial statement account (based on risk and impact of account)
Audit risk - CORRECT ANSWER -The risk that the auditor expresses an inappropriate audit
opinion when the financial statements are materially misstated.
Inherent risk - CORRECT ANSWER -the susceptibility of an assertion to a misstatement due to
error or fraud before consideration of any related controls
Control risk - CORRECT ANSWER -risk that a material misstatement will not be caught by the
internal controls
Detection risk - CORRECT ANSWER -risk that the audit procedures performed will not catch a
material misstatement
AR = IR * CR * DR - CORRECT ANSWER -audit risk is composed of the inherent, control, and
detection risks
AR = RMM x DR - CORRECT ANSWER -audit risk is the risk of material misstatement (entity risk)
times the detection risk
Steps of using audit risk model - CORRECT ANSWER -1. Setting planned level of audit risk
2. Assessing RMM
3. Determine appropriate level of DR
DR = AR/RMM - CORRECT ANSWER -detection risk is determined by finding planned level of
audit risk over the RMM
