Audit Risk Flashcards

1
Q

What is Audit Risk?

A

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

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2
Q

What is Reasonable Assurance?

A

In the context of an audit of financial statements, a high, but not absolute, level of assurance (aka “high level of assurance” and a “low level of audit risk”)

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3
Q

What is the Basic Auditor Responsibility?

A

The auditor should properly plan and perform the audit to obtain reasonable assurance that material misstatements, whether caused by errors or fraud, are detected

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4
Q

The one overriding audit planning objective is to limit audit risk to an appropriately low level, which involves the following…

A

1 Determining the extent and nature of the auditor’s risk assessment procedures
2 Identifying and assessing the risk of material misstatement
3 Determining the nature, timing, and extent of further audit procedures
4 Evaluating whether the financial statements taken as a whole are presented fairly in conformity with GAAP

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5
Q

What’s the meaning of Risk of Material Misstatement (RMM)?

A

The risk that the financial statements are materially misstated prior to the audit

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6
Q

What are the 2 levels of Risk of Material Misstatement (RMM)?

A

1 The overall financial statement level

2 The assertion level for classes of transactions, account balances, and disclosures

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7
Q

What is the RMM at the Overall Financial Statement Level?

A

Risks that are “pervasive” to the financial statements and that potentially affect many assertions

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8
Q

What is the purpose of RMM at the Assertion Level?

A

To determine the nature, timing, and extent of further audit procedures to obtain sufficient appropriate audit evidence

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9
Q

What are the 3 components of RMM at the assertion level?

A

1 Inherent risk
2 Control risk
3 Detection risk

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10
Q

What is Inherent Risk?

A

The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures (environment, we have no control)

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11
Q

What is Control Risk?

A

The probability that a material misstatement that occurred in the first place would not be detected and corrected by internal controls (management’s responsibility to design internal controls) (environment, we have no control)

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12
Q

What is Detection Risk?

A

The probability that a material misstatement that was not prevented or detected and corrected by internal control was not detected by the auditor’s substantive audit procedures (auditor’s responsibility)

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13
Q

What is the order of Risk?

A

audit risk is set, then inherent risk is assessed, then control risk is assessed, and finally the implications for the appropriate level of detection risk are considered

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14
Q

If IR and CR are seen by the auditor as too high, what must be done?

A

The auditor must compensate by decreasing DR

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15
Q

If IR and CR are perceived as low, what must be done?

A

The auditor may consider accepting a higher DR

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16
Q

How does an auditor adjust increasing or decreasing DR?

A

By adjusting the nature, timing, and/or extent of the auditor’s substantive audit procedures

17
Q

What does Nature refer to?

A

What specific audit procedures to perform

18
Q

What does Timing refer to?

A

When will the procedures be performed? At an “interim” date (prior to year-end) or at “final” (after year-end when the books have been closed)

19
Q

What does Extent refer to?

A

Are large samples required for the auditor’s test work or can somewhat smaller sample sizes be justified