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
Which condition would most likely cause an auditor to assess control risk at the maximum level?
Answer: The entity lacks effective internal controls over a financial reporting process
When an entity lacks effective internal controls over a process, the auditor must assess control risk at maximum, requiring more extensive substantive testing.
In insurance underwriting, 'facultative reinsurance' differs from 'treaty reinsurance' in that facultative reinsurance:
Answer: Is negotiated separately for each individual risk
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.
When performing risk assessment for a client with significant estimates, an auditor should:
Answer: Assess whether management has used reasonable assumptions and methods
The auditor must evaluate whether management's assumptions and methods for developing estimates are reasonable and consistent with applicable accounting standards.
Which type of underwriting risk arises from the uncertainty in the frequency and severity of future insurance claims?
Answer: Insurance risk (underwriting risk)
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.
Under PCAOB standards, an auditor's understanding of the company's risk assessment process should include:
Answer: How management identifies and responds to risks of material misstatement
Understanding the entity's risk assessment process includes learning how management identifies business risks, estimates their significance, and responds to them.
A property insurer uses 'schedule rating' in underwriting. This means the insurer is:
Answer: Adjusting filed rates up or down based on specific risk characteristics
Schedule rating allows underwriters to apply credits or debits to filed rates based on specific physical or operational characteristics of the individual risk.
When a CPA identifies a 'material weakness' in internal controls, this means:
Answer: A deficiency where there is a reasonable possibility of material misstatement that will not be prevented or detected
A material weakness is a deficiency, or combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis.