Assessing the Risks of Material Misstatement

Question 1

The auditor performs a series of steps in assessing the risks of material misstatement and responding appropriately to that risk?

Answer 1

Obtain an understanding of internal control, assess the risks of material misstatement, respond to the assessed level of risk, test internal controls, perform substantive procedures, and audit evidence

Question 2

What risk assessment procedures should be used?

Answer 2

Inquiries, analytical procedures, observation and inspection, risk assessment discussion, review external information, and prior period evidence

Question 3

What are the factors to understand the entity and environment?

Answer 3

Selection and application of accounting policies and internal control, including the selection and application of accounting policies

Question 4

PCAOB standards state that the auditor should consider performing the following procedures to obtain an understanding of the nature of the entity?

Answer 4

Read public information, observe or read transcripts of earnings calls, obtain an understanding of senior management compensation arrangements, and obtain information from SEC filings

Question 5

What are risks that relate to specific transactions, account balances, or disclosures at the relevant assertion level?

Answer 5

Assertion level risks

Question 6

What are risks that relate pervasively to the financial statements as a whole and potentially impact many relevant assertions?

Answer 6

Financial statement level risks

Question 7

What are risks that require special audit consideration?

Answer 7

Significant risks

Question 8

When does a significant risk exists?

Answer 8

Inherent risk is exceptionally high

Question 9

What are factors that may be indicative of significant risks?

Answer 9

Risk of fraud, significant recent economic, accounting, or other developments, related parties and related party transactions, improper revenue recognition, nonroutine, unusual, or complex transactions, accounting estimates, illegal acts, and accounting principles that are subject to different interpretations

Question 10

The auditor should document?

Answer 10

The discussion among the audit team, key elements of the understanding of the entity, assessment of the risks of material misstatement, identified risks and related controls, and more complex entity results in more extensive audit procedures