Audit & Assurance: Audit Risk

Question 1

Audit Risk

Answer 1

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

AR = RMM * DR

Question 2

Audit risk model: Risk of material misstatement

Answer 2

RMM = IR * CR

Risk of material misstatement = inherent risk * control risk

Question 3

T or F: The auditor does not control the risk of material misstatement of the fincial statements but merely assesses it.

Answer 3

True.

Question 4

Inherent risk factors that increase the risk of material misstatement at the overall financial statement level

Answer 4

.Poor financial health
.Significant market competition drivign down prices and pressuring cost structures
.The company has never been audited before
.An upcoming purchase or sale of the company
.Imposition of more stringent regulation on the industry and company
.An initial public offering, issuance of new debt, or bank covenants
.Employees with reliance on net income for compensation (bonuses)