AUD 3.3 - Identifying, Assessing, And Responding To Risk

Question 1

Risks that relate pervasively to the financial statements as a whole and potentially impact many relevant assertions:

Answer 1

Financial statement level risks

Question 2

Financial statement level risks include weaknesses related to:

Answer 2

The process used to prepare the financials
Overall control environment
Lack of qualified personnel in financial reporting roles
The selection and application of significant accounting principles

Question 3

Risks that relate to specific transactions, account balances, or disclosures at the relevant assertion level

Answer 3

Assertion level risk

Question 4

Risks that require special audit consideration

Answer 4

Significant risks

Question 5

A significant risk exists when:

Answer 5

Inherent risk is exceptionally high

Question 6

Factors that may be indicative of significant risk include:

Answer 6

Fraud
Related party transactions
Improper revenue recognition
Accounting estimates
Complex transactions
Noncompliance

Question 7

In order to reduce audit risk to an acceptably low level, the auditor should develop the following responses to the assessed risks of material misstatement:

Answer 7

An overall response to address financial statement level risks
A response at the relevant assertion level
A response to significant risks

Question 8

This includes both the purpose (test of controls vs substantive procedures) and its type (inspection, observation, reperformance, etc.) of an audit procedure:

Answer 8

The nature

Question 9

The higher the assessed risk of material misstatement requires what of audit evidence?

Answer 9

The more reliable and relevant audit evidence must be

Question 10

If the auditor uses information provided by the entity’s information system, what must be tested?

Answer 10

The accuracy and completeness of that system

Question 11

This refers to the quantity to be performed, such as the number of observations to be made or the sample size to be used of an audit procedures

Answer 11

Extent

Question 12

The higher the assessed risk of material misstatement requires what of audit procedures?

Answer 12

The greater the extent of audit procedures should be

Question 13

The higher the assessed risks of material misstatement, the closer or further to period-end substantive procedures should be performed?

Answer 13

Closer to year-end

Question 14

Audit tests may be performed at interim if? Audit tests may be performed at year-end if?

Answer 14

Interim if strong controls
Year-end if weak controls

Question 15

The auditors specific approach to identified risks at the relevant assertion level may consist of either:

Answer 15

Substantive approach only
OR
A combined approach

Question 16

When would a substantive approach for relevant assertions an risk be performed?

Answer 16

When there is a maximum control risk because:
There is no effective controls relative to the assertion
The implemented controls are ineffective
It’s not efficient tot test the operating and effectiveness of controls

Question 17

Why would there be a maximum control risk?

Answer 17

There is no effective control related to the assertion
The implemented controls are ineffective
It would be inefficient to test the operating effectiveness of controls

Question 18

When would a combined approach for relevant assertions and risk be performed?

Answer 18

If controls are operating effectively, less assurance will be required from substantive procedures

Question 19

The combined approach uses what tests?

Answer 19

Tests of operating effectiveness of controls and substantive procedures

Question 20

Test of controls are usually required when?

Answer 20

A business uses IT
Audit assertions are related to highly automated processing
Audit evidence is obtained electronically

Question 21

When a test of controls is performed concurrently with a test of details on the same transaction

Answer 21

Dual purpose test

Question 22

When the status of internal controls is: None or weak
What is the control risk assessment set at?
Would the auditors perform a test of controls?
Would the auditors perform substantive procedures?

Answer 22

Control risk assessment: high
Perform control tests: no, unless heavy use of IT
Reform substantive procedures: yes - maximum reliance

Question 23

When the status of internal controls is: there are some
What is the control risk assessment set at?
Would the auditors perform a test of controls?
Would the auditors perform substantive procedures?

Answer 23

Control risk assessment: medium
Perform control tests: yes
Perform substantive procedures: yes - a medium reliance

Question 24

When the status of internal controls is: strong
What is the control risk assessment set at?
Would the auditors perform a test of controls?
Would the auditors perform substantive procedures?

Answer 24

Control risk assessment: low
Perform control tests: yes
Perform substantive procedures: a minimum amount of reliance

Question 25

For all significant risks, the auditor should:

Answer 25

Evaluate the design and implementation of related controls
IF relying on the operating effectiveness of the controls, test of controls must be performed
Perform substantive procedures that are linked to the risk

Question 26

Test of controls are performed when?

Answer 26

Controls are operating effectively
The entity extensively uses IT

Question 27

When can prior year test results for test of controls be relied on?

Answer 27

If not a significant risk, but test of controls must be performed once every 3 years

Question 28

Testing the design and operating effectiveness of controls includes obtaining evidence regarding:

Answer 28

The controls were present and functioning
How the controls were applied
The consistency in which they are applied
By who an by what means the control are applied

Question 29

What is the audit evidence hierarchy?

Answer 29

Auditor knowledge
External evidence
Internal evidence
Oral evidence

Question 30

What types of audit evidence is obtained when testing the design and effectiveness of controls?

Answer 30

A mix of inquiry, observation and inspection

Question 31

What types of audit evidence is obtained when testing the operating effectiveness of controls?

Answer 31

A mix of inquiry, observation, inspection, and reperformance

Question 32

If a control is applied on a transaction basis throughout the period, the auditor should use what type of testing?

Answer 32

Sampling to test the control

Question 33

If controls are deemed to be operating effectively and can be relied upon, what should be done next?

Answer 33

Proceed to substantive procedures based on the assed risk of material misstatement

Question 34

If controls are deemed to not be operating effectively, the auditor should:

Answer 34

Test alternative controls
OR
Reassess control risk, thereby resulting in the need for more reliable and extensive substantive procedures

Question 35

What is used to detect material misstatement at the relative assertion level?

Answer 35

Substantive procedures

Question 36

What is required for each material transaction class, account balance, or disclosure regardless of the assessed risk of material misstatement?

Answer 36

Substantive procedures

Question 37

What should substantive procedures include?

Answer 37

Agreement to the financials
Examination of material journal entries or adjustments
Evaluation of the overall presentation of the financials

Question 38

What are the two types of substantive procedures?

Answer 38

Tests of details
Substantive analytical procedures

Question 39

This consists of audit procedures used to gather evidence to support the account balance as reflected in the financial statements

Answer 39

Test of details

Question 40

This consist of evaluations of financial information made by a study of plausible relationships among both financial and nonfinancial data. Comparisons of recorded amounts to be independent expectations developed by the auditor.

Answer 40

Substantive analytical procedures

Question 41

What type of substantive procedures I used when there is a large volume of predictable transactions?

Answer 41

Substantive analytical procedures

Question 42

What type of substantive procedures is used when obtaining evidence regarding the existence nd valuation of account balances?

Answer 42

Test of details

Question 43

What may be used to reduce detection risk to an acceptably low level if tests of controls indicate that control are operating effectively?

Answer 43

Substantive analytical procedures

Question 44

What may be used if tests of controls indicate that control are not operating effectively?

Answer 44

Test of details only

Question 45

Only use substantive testing at interim if…

Answer 45

Risk of material misstatement is low

Question 46

Performing substantive procedures at an interim date increases the risk that?

Answer 46

The auditor will not detect material misstatements int he financials. The longer the period between interim and year end, the greater that risk

Question 47

If there is an identified fraud risk of material misstatement, the auditor should perform substantive procedures when?

Answer 47

At or near year end