AUD 3.2 - Audit Risk

Question 1

The risk that the auditor may unknowingly fail to appropriately modify the opinion on financials that are material misstate

Answer 1

Audit risk

Question 2

Why does audit risk occur?

Answer 2

Because auditor obtains only reasonable assurance (not absolute)

Question 3

An omission or misstatement of accounting information that, in light of circumstances, makes it probable that the judgement of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.

Answer 3

Material misstatement

Question 4

What are the three types of misstatements?

Answer 4

Factual misstatements
Judgemental misstatements
Projected misstatements

Question 5

Misstatements about which there is no doubt:

Answer 5

Factual misstatement

Question 6

Differences arising from the judgements of management concerning accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate:

Answer 6

Judgemental misstatements

Question 7

The auditors best estimate of misstatements in populations, involving the projection of misstatements identified in audit samples to the entire population from which the samples were drawn:

Answer 7

Projected misstatements

Question 8

Formula for calculating audit risk:

Answer 8

(Inherent risk X control risk) X detection risk

(IR X CR) = risk of material misstatement

Question 9

How is the risk of material misstatement different from detection risk?

Answer 9

RMM exists independent of the financial statement audit
Detection risk is controlled by the auditor and RMM is assessed by the auditor

Question 10

In the assessment of RMM, the auditor can:

Answer 10

Make a single overall assessment
OR
Separately assess inherent risk and control risk and then combine these risk assessments

Question 11

The susceptibility of a relevant assertion to a material misstatement, assuming that there are no related controls

Answer 11

Inherent risk

Question 12

The auditor assesses inherent risk as HIGH if:

Answer 12

The account is more likely to contain a material misstatement

(High volume transactions, complex calculations, estimates, cash)

Question 13

The auditor assess inherent risk as LOW if:

Answer 13

The account is not likely to contain a material misstatement

Question 14

The risk that a material misstatement that could occur in a relevant assertion will not be prevented or detected on a timely basis by the entity’s internal control. This is a function of the effectiveness of the design and operation of internal controls:

Answer 14

Control risk

Question 15

The auditor assess control risk as HIGH if:

Answer 15

No effective controls related to the assertion in place
The implemented controls are not operating effectively
Not efficient to test the operating effectiveness of controls

Question 16

The risk that the auditor will not detect a material misstatement that exists in a relevant assertion. This is a function of the effectiveness of the audit procedures and of the manner in which they are applied:

Answer 16

Detection risk

Question 17

Detection risk can be divided into what two things?

Answer 17

Test of details risk and substantive analytical procedures risk

Question 18

When the auditor determines that the risk of material misstatement is high, detection risk should be set at?

Answer 18

LOW

Question 19

When the auditor determines that the risk of material misstatement is low, detection risk should be set at?

Answer 19

HIGH

Question 20

If RMM is high, detection risk is low, why?

Answer 20

Because we perform more work to reduce the detection risk

Question 21

If RMM is low, detection risk is high, why?

Answer 21

Because we perform less work to reduce the detection risk

Question 22

What are the steps required in assessing audit risk during engagement planning?

Answer 22

1. Determine audit risk
2. Assess inherent risk
3. Assess control risk
4. Determine detection risk

Question 23

Audit risk is usually set at what level?

Answer 23

Low to ensure that the auditor does not render an incorrect opinion

Question 24

If the control risk is assessed below high, then the auditor needs to do what?

Answer 24

Test internal controls to prove that the controls are operating effectively