Ch. 6 - Risk

Question 1

What is Audit Risk

Answer 1

the risk that an auditor expresses an inappropriate opinion when the FS are materially misstated

Question 2

Audit Risk Model

Answer 2

Acceptable Audit Risk = IR x CR x DR

Question 3

Detection Risk

Answer 3

The risk that the procedures performed won’t detect a material misstatement

Question 4

Inherent Risk

Answer 4

the risk of material misstatement of the FS before considering related controls

Question 5

Inherent risk factors at OFSL - examples

Answer 5

1. a company in poor financial condition
2. significant competition
3. first time audit
4. upcoming sale of the company
5. upcoming IPO

Question 6

Control Risk

Answer 6

the risk that internal controls of the company will not catch material misstatements

Question 7

Control risk factors at OFSL - examples

Answer 7

1. use of an outdated GL system
2. lack of segregation of duties
3. lack of an internal audit team
4. lack of computer controls
5. lack of policies

Question 8

Procedures to address the RMM at OFSL

Answer 8

1. emphasize professional skepticism
2. assign more experienced staff
3. increase supervision
4. add elements of unpredictability

Question 9

Inherent risk factors at assertion level - examples

Answer 9

1. change in technology
2. type of inventory held
3. complex transactions
4. unusual or non-routine transcations

Question 10

control risk factors at assertion level - examples

Answer 10

1. information processing controls
2. physical controls
3. segregation of duties