AUD 3 - Identifying, Assessing, and Responding to Risk

Question 1

How do you identify significant risk?

Answer 1

A significant risk exists when inherent risk is exceptionally high

Question 2

Are risk assessment procedures required in financial statement audits?

Answer 2

Risk assessment procedures are ALWAYS required in financial statement audits

Question 3

What are the factors of detection risk?

Answer 3

1) Nature - what you do (procedure performed)
2) Extent - how you do (quantity performed / tested)
3) Timing - when you do it (if strong controls, can do more work @ interim date)

Question 4

Define the relation between strong controls and weak controls as they relate to substantive testing?

Answer 4

Strong controls - less substantive testing (but never eliminate testing fully)

Weak controls - more substantive testing

Question 5

Can you rely upon prior year control test results?

Answer 5

1) You cannot rely upon prior year control test results if there is SIGNIFICANT RISK
2) You CAN rely upon prior year control test results if there is NOT significant risk (once every 3 years)