Audit Risk

Question 1

Inadequate internal control over assets may increase the susceptibility of misappropriation of assets due to

Answer 1

inadequate access controls over automated records

inadequate physical safeguard over assets

inadequate management understanding of information technology

Question 2

Statements on auditing standards, specifically require auditors to assess the risk of material misstatements due to

Answer 2

fraud and to consider that assessment in designing the audit procedures to be performed.

Question 3

Auditors obtain knowledge about management’s risk assessment through

Answer 3

procedures performed to obtain an understanding of the entity and its environment, including internal controls.

Question 4

Decisions about how much and what types of evidence involve

Answer 4

making decisions with regard to materiality and risk.

Question 5

Inherent risk

Answer 5

is the possibility of a material misstatement in the financial statements due to lack of perfection and 100 percent efficiency at all time from both humans and systems/technology.

Question 6

Control risk

Answer 6

is the risk that a material error will not be prevented or detected on a timely basis by the client’s internal control

Question 7

Detection risk

Answer 7

is the risk that the auditor will not detect a material error in the financials

Question 8

The three fundamental conditions necessary for the commission of fraud are

Answer 8

(1) some type of incentive or pressure, (2) an opportunity to commit the fraud and (3) an attitude that allows the individual to rationalize the act.

Question 9

Situations that raise risk factors

Answer 9

new employees, 
new systems, 
new products, 
new territories, 
new competitors, 
and new accounting pronouncements.

Question 10

If either inherent risk or control risk is especially high,

Answer 10

then enough substantive testing must be done by the auditor so that detection risk is reduced low enough to compensate. In that way, even if inherent risk is high, the reduction of detection risk will offset that impact so that overall audit risk remains unchanged.