Audit Risk Flashcards

1
Q

Define audit risk:

A

Risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated

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2
Q

Audit risk is a probability and that the audit risk and materiality are interrelated by the definition of audit risk?

A

True

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3
Q

Define reasonable assurance:

A

that audit risk cannot be reduced to a zero probability. High but not absolute level of confidence.

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4
Q

The one overriding audit planning objective is to…?

A

limit audit risk to an appropriate low level

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5
Q

The risk of material misstatement (RMM) is defined as and contains what components?

A

1) The financial statement level

2) The assertion level

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6
Q

Risk of material misstatement at the financial statement level refers to risk that…

A

are perverse to the financial statements and potentially affect many assertions

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7
Q

Risk of material misstatement at the assertion level consists of three component risks, what are they?

A

1) Inherent Risk
2) Control Risk
3) Detection Risk

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8
Q

Define Inherent Risk:

Control Risk:

Detection 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

That a material misstatement that occurred in the first place would not be detected by internal controls

The probability that a material misstatement that was not prevented or detected and corrected by internal control was not detected by the auditors substantive audit procedures

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9
Q

The more you increase detection risk or decrease detection risk (what’s in the auditors control), what happens?

A

It adjusts the amount of substantive testing the auditors will do

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