4 Risk

Question 1

What are the two types of material misstatement risks?

Answer 1

Inherent risks and control risks

Question 2

What are the two types of detection risks?

Answer 2

Sampling risks and non sampling risks

Question 3

How do you calculate the audit risk?

Answer 3

Audit risk = inherent risk x control risk z detection risk

Question 4

What is audit risk?

Answer 4

The risk that the auditor expresses an inappropriate opinion on the financial statements. Audit risk comprises the risk of material misstatement and detection risk.

Question 5

What is the risk of material misstatement?

Answer 5

The risk that the financial statements are materially misstatement period to the audit commencing

Question 6

What is inherent risk?

Answer 6

The susceptibility of an assertion about transactions, balances or disclosure to a misstatement which could be material, assuming there were no related internal control

Question 7

What is control risk?

Answer 7

The risk that a misstatement is not prevented, detected or corrected by the entity’s internal control systems

Question 8

What is a detection risk?

Answer 8

The risk that the procedures performed by the auditor do not detect a misstatement that exists and could be material

Question 9

What is a sampling risk?

Answer 9

The risk that the conclusion drawn from the sample would be different if the whole population would of be tested

Question 10

What is a non sampling risk?

Answer 10

The risk of drawing the wrong conclusion for other reasons

Question 11

What is professional scepticism?

Answer 11

an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to fraud or errors and a critical assessment of audit evidence

Question 12

What is professional judgement?

Answer 12

Application of relevant training, knowledge and experience in making informed decisions about the course of action that are appropriate to the unique circumstances of the audit engagement

Question 13

What is misstatement?

Answer 13

A difference between the amount, classification prevention or disclosure

Question 14

What is materially?

Answer 14

Misstatements, including omissions are considered to be material if they individually or in the aggregate could reasonably be expected to influence the economic decisions of users taken on the basis of financial statements

Question 15

What is the % for revenue for materially?

Answer 15

1/2 - 1% revenue

Question 16

What is the % for profit for materiality?

Answer 16

5-10% of profit

Question 17

What is the % of total assets for materiality?

Answer 17

1-2% of total assets

Question 18

What are items material be nature?

Answer 18

Compliance with laws and regulations
Compliance with debt covenants
Turn a profit into a loss
Transactions with directors

Question 19

What is performance materiality?

Answer 19

An amount set at less than materiality for its FS as a whole, to reduce the risk that the aggregate of smaller misstatements in individual account balances or classes or transactions could exceed materiality

Question 20

What is the purpose of risk assessment?

Answer 20

Identify areas of the financial statements where misstatements are likely to occur early in the audit

Question 21

What are some risk assessment procedures?

Answer 21

Enquiries with management
Analytical procedures
Observation

Question 22

What should the auditor know about the clients environment?

Answer 22

Industry conditions
Laws and regulations
Other external factors

Question 23

What should an auditor know about the entity?

Answer 23

Operations
Ownership and governance
Structure and finance 
Accounting policies
Objectives and strategies
System of internal control

Question 24

What is the definition of analytical procedures?

Answer 24

Evaluations of financial informations through analysis of plausible relationships among both financial and non financial data and investigation of possible fluctuations, inconsistent relationships or amounts that differ from expected values

Question 25

How are analytical procedures used in the planning stage?

Answer 25

Assist in assessing risks of material misstatement in order to provide a basis for designing and implementing responses to assessed risks