Risk Assessment & Underwriting Flashcards
7 cards from real CPA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Assessment & Underwriting flashcards as text
Under AU-C Section 315, which of the following is an example of an entity-level control relevant to risk assessment?
Answer: Management's commitment to competence and ethical values
Entity-level controls include the control environment elements such as management's commitment to competence and ethical values, which pervasively affect all other controls.
Which risk assessment procedure involves the auditor making observations about whether reconciliations are actually being performed?
Answer: Observation
Observation involves the auditor watching a process or procedure being performed, such as observing staff performing reconciliations.
In insurance underwriting, 'adverse selection' refers to:
Answer: Higher-risk individuals being more likely to seek insurance coverage
Adverse selection occurs when people with higher risk are disproportionately likely to purchase insurance, leading to an imbalanced risk pool.
A CPA auditing an insurance company's underwriting files would use 'loss ratio' primarily as:
Answer: A key performance metric comparing incurred losses to earned premiums
The loss ratio equals incurred losses divided by earned premiums and is the primary metric for evaluating underwriting profitability.
When assessing inherent risk at the assertion level, which factor is most relevant for a technology company's software revenue recognition?
Answer: Complexity of multi-element software arrangements
Complex multi-element software arrangements create high inherent risk for revenue recognition because allocating transaction prices among performance obligations requires significant judgment.
Which of the following best describes a 'significant risk' in auditing standards?
Answer: An identified and assessed risk of material misstatement requiring special audit consideration
A significant risk is an identified and assessed risk of material misstatement that requires special audit consideration due to its nature or magnitude.
In underwriting, the 'expense ratio' measures:
Answer: Underwriting expenses as a percentage of net written premiums
The expense ratio is calculated by dividing underwriting expenses (acquisition costs, administrative costs) by net written premiums.