Audit Risk

Question 1

Define “control risk.”

Answer 1

The probability that a material misstatement, which occurred in the first place, would not be detected by applicable internal controls

Question 2

What audit risk model is applicable to classes of transactions or to account balances?

Answer 2

Audit risk = Inherent risk × Control risk × Detection risk

Question 3

List the variables of planned audit procedures that can be adjusted to change detection risk.

Answer 3

Nature
Timing
Extent of substantive testing

Question 4

Define “audit risk.”

Answer 4

The probability that the auditor fails to modify the opinion on financial statements that contain a material misstatement

Question 5

What risk is within the auditor’s control?

Answer 5

Detection risk

Question 6

Define “risk of material misstatement.”

Answer 6

The risk that the financial statements contain one or more material misstatements prior to the audit. (Note: RMM = IR × CR)

Question 7

Define “inherent risk.”

Answer 7

The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures

Question 8

Define “detection risk.”

Answer 8

The probability that a material misstatement, which was not prevented or detected by internal control, was not detected by the auditor’s substantive audit procedures