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CPA: Audit > Audit Risk Model > Flashcards

Audit Risk Model Flashcards

1
Q

Control risk is determined to be high. To lower detection risk, what must be done?

A

Do more substantive testing.

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2
Q

How do you raise detection risk?

A
  • Perform less testing
  • Perform testing at interim instead of year end
  • Test controls instead of substantive tests
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3
Q

What type of risk can the auditor control?

A

Detection risk

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4
Q

What type of risk does the auditor have NO control over?

A

Inherent risk and control risk

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5
Q

Can inherent risk and control risk be changed at the auditor’s discretion?

A

NO, they exist independently from the audit. Auditor has no control.

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6
Q

What type of risk is assessed first?

A

Inherent risk.

You pull up to the motel, assess the outside and guess what the inside looks like BEFORE going in.

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7
Q

The more substantive testing you do, the more you lower _______ _____

A

detection risk

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8
Q

In regards to timing, what reduces detection risk

A

Testing at year end, rather than interim

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9
Q

An auditor assesses control risk in order to:

A

determine the amount of detection risk that the auditor is willing to accept.

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10
Q

What risks are included in RMM? (Risk of Material Misstatement)

A

Inherent & Control Risk

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11
Q

What risks make up overall AUDIT RISK?

A

Inherent Risk
Control Risk
Detection Risk

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12
Q

When the acceptable level of detection risk decreases, is that GOOD or BAD?

A

BAD

If detection risk is decreasing, it means that other risk was assessed high. If assessed high, we must perform increasing substantive testing due to our low level of acceptable detection risk.

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13
Q

Just a note:

A

Inherent Risk / Control risk assessed HIGH =

Auditor puts acceptable Detection risk LOW =

Substantive testing HIGH

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14
Q

When an auditor reduces detection risk, what other risk are they reducing?

A

Overall audit risk.

Reducing detection risk means increasing the NET (nature, extent, timing of testing) in order to reduce overall Audit Risk.

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15
Q

Scatter plots show the relationship between two set of data. The relationship is called:

A

correlation

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16
Q

A typical line chart shows

A

changes in data over time

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17
Q

In the current year, Collins Corp changed its accounting software. Auditors want to maintain same level of overall audit risk.
What happen to:

Inherent risk
Control risk
Detection risk

A

Inherent risk: Increases
Control risk: No impact
Detection risk: Decreases

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18
Q

Auditors choose correct testing procedure but only rely on internally generated evidence.

Auditors want to maintain same level of overall audit risk. What would happen to:

Inherent risk
Control risk
Detection risk

A

Inherent risk NO impact
Control risk NO impact
Detection risk Increases

Auditors messed up. Not able to maintain the same level of overall audit risk.

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19
Q

Auditors test controls and deem them to be ineffective.

Auditors want to maintain same level of overall audit risk. What would happen to:

Inherent risk
Control risk
Detection risk

A

Inherent risk: NO impact
Control risk: Increase
Detection risk: Decrease

Auditors change NET to maintain overall audit risk.

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20
Q

Foreign currency transactions translated to dollars.

Auditors want to maintain same level of overall audit risk. What would happen to:

Inherent risk
Control risk
Detection risk

A

Inherent risk: INCREASES
Control risk: NO IMPACT
Detection risk: DECREASE

Auditors change NET in order to maintain same level of overall audit risk.

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21
Q

During the year, a new technology made part of inventory obsolete.

Auditors want to maintain same level of overall audit risk. What would happen to:

Inherent risk
Control risk
Detection risk

A

Inherent risk: INCREASES
Control risk: NO IMPACT
Detection risk: DECREASE

Obsolete inventory increases inherent risk because there would be more pressure on the company. They don’t want to write down inventory. Overstated inventory = overstated net income. Auditors adjust NET to maintain same overall audit risk.

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22
Q

Several related party transactions:

Auditors want to maintain same level of overall audit risk. What would happen to:

Inherent risk
Control risk
Detection risk

A

Inherent risk INCREASE
Control risk NO IMPACT
Detection risk DECREASE (do more testing on related party transactions)

23
Q

Revenue Cycle: Shipping & Warehousing are combined to save money.

Auditors want to keep same level of overall audit risk. What happens to:

Inherent risk
Control risk
Detection risk

A

Inherent risk: NO impact
Control risk: INCREASE
Detection risk: DECREASE

Segregation of duties not there. Have custody of inventory AND can ship it out.
Worried about theft. Auditors do more substantive testing on this area, closer to balance sheet date.

24
Q

If you analytical procedures, remember it has nothing to do with

A

CONTROL risk. Control risk is not assessed with analytical procedures.

25
Q

Analytical procedures never mean ____ risk and always mean _____ risk.

A

Analytical procedures never mean CONTROL risk and always mean INHERENT risk.

26
Q

Technology has outdated some of the client’s safeguarding of assets.

Auditors want to maintain the same level of overall audit risk.

What happens to:

INHERENT RISK
CONTROL RISK
DETECTION RISK

A

INHERENT RISK: no impact
CONTROL RISK: increases
DETECTION RISK: decreases

27
Q

The auditor’s consider management operating style to be overly aggressive.

Auditors want to maintain the same level of overall audit risk.

What happens to:

INHERENT RISK
CONTROL RISK
DETECTION RISK

A

INHERENT RISK no impact
CONTROL RISK increases
DETECTION RISK decrease

Management operating style = control risk.

28
Q

What type of risk is related to the fact that a lot of GAAP is related to estimates? Risk of error/bias.

A

Inherent risk

29
Q

What type of risk is related to the fact that a lot of management has turned over?

A

Inherent risk

30
Q

Testing controls at interim rather than at year end impacts what type of risk?

A

Increases detection risk. Testing at interim increase the risk that the auditors will fails to detect a material misstatement that impacts the financial statements.

31
Q

What is performance materiality?

A

Performance materiality is set by the auditor at less than materiality for the financial statements as a whole to allow room for undetected misstatements to be present and still provide an opinion that the financial statements are presented fairly.

32
Q

In the planning stage of a f/s audit, the auditor’s preliminary judgement about materiality levels is determined by what?

A

the financial statement of the prior year are used. The auditor would use the size of net income, the size of net assets to set materiality levels.

33
Q

When an auditor evaluates the reasonableness of a client’s prior year accounting estimates looking for later events that might corroborate those earlier client estimates, this is known as a

A

retrospective review

34
Q

Materiality in the planning stage of the audit is known as

A

performance materiality

35
Q

The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures is known as what type of risk?

A

Inherent Risk

36
Q

Audit Risk consists of what 3 risks?

A

Inherent risk
Control risk
Detection risk

37
Q

True or false:

Since public companies have greater exposure to litigation, a lower materiality threshold may apply.

A

TRUE

38
Q

True or False:

A higher materiality threshold may apply to private companies since the owners are the primary users of the financial statements and the owners are closer to day to day operations compared to stockholders of a public company.

A

True.

39
Q

The risk of material misstatement is defined as the risk that:

A

the financial statements are material misstated prior to the audit.

40
Q

What types of materiality does the auditor need to document during planning?

A
  1. Materiality for the f/s as a WHOLE
  2. Materiality for particular ACCOUNT balances, transactions, disclosures
  3. PERFORMANCE materiality
41
Q

What term describes the amount of materiality allocated to individual audit areas?

A

tolerable misstatement

42
Q

With regard to materiality, an auditor considers materiality for planning purposes in terms of the _____ aggregate level of misstatements that could be material to any one of the financial statements

A

With regard to materiality, an auditor considers materiality for planning purposes in terms of the SMALLEST aggregate level of misstatements that could be material to any one of the financial statements

43
Q

Do the parties who are expected to rely on the f/s have an impact on the planning of the audit?

A

NO, they have no impact.

44
Q

Performing analytical procedures to determine trends is done in what stage of the audit?

A

The planning stage as part of determining the overall audit strategy.

45
Q

RMM =

A

Inherent Risk x Control Risk

46
Q

Valuations of financial information through analysis of plausible RELATIONSHIPS among both financial and non-financial DATA are referred to as:

A

analytical procedures

47
Q

Audit risk consists of what?

A

Inherent + Control + Detection risks

48
Q

What could possibly be done in order to determine integrity and auditability of a client prior to accepting an engagement?

A
  • inquire of attorneys, bankers, business leaders about the company
  • contact predecessor auditors
  • assess adequacy of accounting records for proper information as well as proper recording of transactions
49
Q

Which of the following is correct with regard to analytical procedures performed in the planning stage of a financial statement audit?

I. Required as part of the auditor’s risk assessment procedures

II. Assists the auditor in understanding the entity and its environment

A

BOTH

Analytical procedures performed in the planning stage of a financial statement audit ARE required as part of the auditor’s risk assessment procedures AND assists the auditor in understanding the entity and its environment

50
Q

If inventory is _____ and of _____ value, there is a risk of theft.

A

If inventory is small and of high value, there is a risk of theft.

51
Q

At the beginning of the audit engagement, key members of the audit team or the entire team should meet and discuss where and how fraud might occur, and how fraud may be concealed. This is referred to in GAAS as

A

brainstorming

52
Q

Mandatory vacations help to

A

both prevent and detect theft.

Prevent: because you know someone else will be doing your job while you are on vacation, less likely to engage in theft

Detect: Uncovered when an employee suddenly and unexpectedly has to miss several days of work

53
Q

What is the purpose of using audit data analytics?

A

Used to obtain an understanding of the entity and its environment

CPA: Audit (9 decks)

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