Ch 4 Risk Assessment

Question 1

Audit Risk

Answer 1

risk that the auditor expresses an inappropriate audit opinion when the FSs are materially misstated.

Question 2

At the assertion level, audit risk consists of

Answer 2

The risk that the relevant assertions related to the class of transaction, account balance, or disclosure contain misstatements that could be material to the FSs
(risk of MM = IR x CR)

The risk that the auditor will not detect such misstatements (detection risk)

Question 3

 Inherent risk (IR)

Answer 3

The susceptibility of an assertion in an account or disclosure to a misstatement due to error or fraud that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.

Question 4

 Control risk (CR)

Answer 4

The risk that a misstatement that could occur in an assertion about an account or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.

Question 5

The levels of inherent risk and control risk are functions of

Answer 5

the entity and its environment- auditor has no control

Question 6

Combination of IR & CR defined as risk of

Answer 6

material misstatement (RMM)

Question 7

material misstatement (RMM)

Answer 7

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

this is a client risk bc stems from decisions made by entity like what kinds of business transactions to engage in and how much to invest in internal controls

Question 8

Detection risk (DR)

Answer 8

The risk that the procedures performed by the auditor will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

Determined by the effectiveness of the audit procedures and how well the procedures are applied by auditor

Question 9

Audit risk model

Answer 9

AR = RMM x DR where RMM = (IR x CR)

Question 10

Engagement risk

Answer 10

The risk that the auditor is exposed to financial loss or damage to his or her professional reputation from litigation, adverse publicity, or other events arising in connection with financial statements audited and reported on.

Question 11

3 steps in auditors use of audit risk model at assertion level

Answer 11

(1) set a planned level of audit risk
(2) assess the risk of MM
(3) determine the appropriate level of detection risk

Question 12

Risk Assessment

Answer 12

the identification, analysis, and management of risks relevant to the preparation of financial statements that are fairly presented in conformity with GAAP.

Question 13

Business risks

Answer 13

A risk resulting from significant conditions, events, circumstances, and actions or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies or from the setting of inappropriate objectives and strategies.

Question 14

Audit data analytics

Answer 14

Using analysis, modeling, and visualization to discover and analyze patterns, anomalies, and other information in data in the context of the audit.

Question 15

Analytical procedures

Answer 15

Evaluations of financial information made through analysis of plausible relationships among both financial and nonfinancial data.

Question 16

Errors

Answer 16

Unintentional misstatements or omissions of amounts or disclosures.

Question 17

Fraud

Answer 17

An intentional act by one or more among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in the financial statements.

Question 18

Auditors understanding of the entity and its environment includes knowledge about these categories

Answer 18

Nature of entity

Selection and application of accounting principles

Industry, regulatory, and other external factors

Objectives, strategies, related business risks

Entity performance measures

System of internal control

Question 19

Misstatements due to errors or fraud include

Answer 19

an error in gathering or processing data from which FS are prepared

an omission of an account or disclosure, including inadequate or incomplete disclosures required to meet disclosure objectives of certain financial reporting frameworks as applicable

a FS disclosure that is not presented in accordance with GAAP

an incorrect accounting estimate arising from overlooking or clearly misinterpreting facts

judgements of management concerning account estimates that the auditor considered unreasonable or the selection or application of accounting policies that the auditor considers inappropriate

an inappropriate classification, aggregates or disaggregation of information

the omission of a disclosure necessary for the FS to achieve fair presentation beyond disclosures specifically required by the framework

Question 20

Factual misstatements

Answer 20

These are misstatements about which there is no doubt.

For example, an auditor may test a sales invoice and determine that the prices applied to the products ordered are incorrect. Once the products are correctly priced, the amount of misstatement is known. In such cases, the auditor knows the exact amount of the misstatement.

Question 21

Judgmental misstatements

Answer 21

These are misstatements that arise from the judgments of management concerning accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate.

Question 22

Projected misstatements

Answer 22

These are the auditor’s best estimate of misstatements in populations, involving the projection of misstatements identified in an audit sample to the entire population from which the sample was drawn.

Question 23

Fraud classified into 2 types

Answer 23

(1) misstatements resulting from fraudulent financial reporting
(2) misstatements resulting from misappropriation of assets

Question 24

The fraud risk assessment process

Answer 24

discussion among audit team regarding risks of MM due to fraud

inquiries of mgmt, audit committee, and other about their views on the risks of fraud and how it’s addressed

identification and assessment of fraud risk factors

consideration of any unusual or unexpected relationships that have been identified in performing analytical procedures in planning the audit

understanding of the entity’s period-end closing process and investigating unexpected period-end adjustments

Question 25

Inherent risk and control risk differ from detection risk in that inherent risk and control risk are

Answer 25

Functions of the client and its environment, while detection risk is not

Question 26

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would

Answer 26

Decrease planned detection risk

Question 27

The acceptable level of detection risk is inversely related to the

Answer 27

Assurance provided by substantive tests

Question 28

Which of the following would an auditor most likely use in determining the auditor’s preliminary judgment about materiality?

Answer 28

The entity’s financial statements of the prior year

Question 29

The risk that an auditor will conclude, based on substantive tests, that a material error does not exist in an account balance when, in fact, such error does exist is referred to as

Answer 29

Detection risk

Question 30

When an auditor increases the assessed level of control risk because certain control activities were determined to be ineffective, the auditor most likely would increase the

Answer 30

extent of substantive tests of details)

Question 31

Which of the following audit risk components may be assessed in quantitative terms?
Control risk, Detection risk, Inherent risk

Answer 31

yes yes yes

Question 32

In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following?

Answer 32

The susceptibility of an assertion to material misstatement assuming there are no related controls.

Question 33

An auditor finds several errors in the financial statements that the client prefers not to correct. The auditor determines that the errors are not material in the aggregate. Which of the following actions by the auditor is most appropriate?

Answer 33

Document errors in the summary of uncorrected errors, and document the conclusion that the errors are not material in the aggregate.

Question 34

Which of the following is a definition of control risk?

Answer 34

The risk that material misstatements will not be prevented or detected on a timely basis by employees acting in the normal course of their assigned duties

Question 35

Which of the following concepts are pervasive in the application of auditing standards?

Answer 35

materiality and audit risk

Question 36

The existence of audit risk is recognized by the statement in the auditor’s standard report that the auditor:

Answer 36

obtains reasonable assurance about whether the financial statements are free of material misstatement.

Question 37

Risk of material misstatement refers to a combination of which two components of the audit risk model?

Answer 37

inherent risk and control risk

Question 38

As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to:

Answer 38

find smaller errors.

Question 39

Which of the following characteristics most likely would heighten an auditor’s concern about the risk of intentional manipulation of financial statements?

Answer 39

Management places substantial emphasis on meeting earnings projections.

Question 40

Which of the following is a misappropriation of assets?

Answer 40

An employee of a consumer electronics store steals 12 CD players.

Question 41

Auditing standards require auditors to make certain inquiries of management regarding fraud. Which of the following inquiries is required?

Answer 41

whether management has any knowledge of fraud that has been perpetrated on or within the entity

Question 42

Which of the following is an example of fraudulent financial reporting?

Answer 42

Company management falsifies the inventory count, thereby overstating ending inventory and understating cost of sales.

Question 43

When is a duty to disclose fraud to parties other than the entity’s senior management and its audit committee most likely to exist?

Answer 43

in response to inquiries from a successor auditor

Question 44

Which of the following is correct concerning required auditor communications about fraud?

Answer 44

Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.