AUD 3.4 - Specific Areas Of Engagement Risk

Question 1

An act of omission or commission by an entity, whether intentional or unintentional, which is contrary to prevailing laws and regulations.

Answer 1

Noncompliance

Question 2

The auditor is responsible for obtaining reasonable assurance that the financials are free of misstatement due to noncompliance, but the auditor is not responsible for:

Answer 2

Preventing noncompliance and cannot be expected to detect noncompliance with all laws and regulations

Question 3

What are some inherent limitations on an auditors ability to detect material misstatements due to noncompliance?

Answer 3

Many laws and regulations relating to an entity’s operations do not affect the financials
Noncompliance may be concealed by collusion, forgery or deliberate failure to record

Question 4

If the auditor suspects noncompliance may exist, the auditor must discuss the matter with who?

Answer 4

Management one level above those suspected and when appropriate those charged with governance

Question 5

If noncompliance has a material effect on the financials and has not been reflected in the financials, what opinion should be issued?

Answer 5

Qualified or adverse (GAAP issue)

Question 6

If unable to obtain appropriate sufficient audit evidence about noncompliance or suspected noncompliance, what opinion should be issued?

Answer 6

Qualified or disclaimer of opinion (GAAS issue)

Question 7

The susceptibility of an accounting estimate to an inherent lack of precision in its measurements

Answer 7

Estimation uncertainty

Question 8

Estimations with low estimation uncertainty typically result in what assessed risk of material misstatement and what amount of persuasive evidence is needed?

Answer 8

Lower assessed risk of misstatement and less persuasive evidence needed

Question 9

Estimations with high estimation uncertainty typically result in what assessed risk of material misstatement and what amount of persuasive evidence is needed?

Answer 9

Increase in the assessed risk of material misstatement and an increase in persuasive evidence needed

Question 10

Contingent liabilities that are probable and reasonably estimated must be:

Answer 10

Accrued and disclosed

Question 11

What is the audit risk associated with contingencies?

Answer 11

That they understate expenses and liabilities

Question 12

If management indicates in the financials that the third party transaction was consummated on arms-length terms and the auditor believes that this statement is unsubstantiated, what opinion should be issued?

Answer 12

Qualified or adverse (GAAP problem)