chap 9 assessing inherent risk

Question 1

the specivid response to an identified risk of fraud can include revising assessments of what (3)

Answer 1

AA risk inherent risk control risk

Question 2

T/F individual items making up the total population often affect the auditors expectation of material misstatments

Answer 2

T

Question 3

T/F most auditors set a lower inherent risk in the first year of an audit and increase it in subsequent years as they gain more knowledge about the client

Answer 3

F higher decrease it

Question 4

T/F the inclusion of inherrent risk in the audit risk model indicates that auditors should attempt to predict where missatement are most and least lekely in the FS segments

Answer 4

T

Question 5

the lack of previous years audit results causes most auditors to assess a lower/higher inherent risk for initial audits than for repeat engagements in which no material missattement was found

Answer 5

higher

Question 6

the lack of previous years audit results causes most auditors to assess a higher inherent risk for which audit……initial or repeat engagements in which no material misstatements were found

Answer 6

initial

Question 7

inherent risk for certain audit ______ is affected by the nature of the clients business

Answer 7

objectives

Question 8

T/F it is difficult to separate fraud risk into AA risk, inherent risk, and control risk

Answer 8

T

Question 9

what are the 9 major factors that make up inherent risk?

Answer 9

1. nature of the clients business 2. results of previous audits 3. initial vs repeat engagment 4. related parties 5. complex or nonroutine transactions 6. judgment required to correctly record account balances and transactions 7. factors related to fraudulent reporting 8. makeup of the population 9. factors related to misappropriation of assets

Question 10

misstatement found in previous years audit have a high likelyhood of occurring agin in the current year’s audit. why?

Answer 10

because many types of misstatements are systematic in nature and organizations are oten slow in making changes to eliminate them

Question 11

what info previously gained can help with assessesing the nature of the clients business in relation to inherent risk?

Answer 11

info gained whil obtaining knowledge about the clients business and industry and assessing client business risk

Question 12

inherent risk affects what 3 areas ?

Answer 12

1. the amount of evidence that needs to be accumulated 2. the assignment of staff 3. the review of audit documentation

Question 13

why does the judgement required to correctly record account blances and transactions increase inherent risk?

Answer 13

because account balances and transactions that require estimates and a great edeal of management judgement related to valuation are more subjective and require considerable judgement, the likelhood of misstatement increases

Question 14

the auditior must evaluate the info affecting inherent risk to assess the risk of material misstatments at the audit objective level for ? (3)

Answer 14

cycles balances disclosure

Question 15

transactions that are unusual for a client or involve lengthy or complex contracts can increase inherent risk. why?

Answer 15

they are more likely to be incorrectly recorded becuase the client often lacks experience recording them

Question 16

the risk of fraud should be assessed for the entire audit as well as by ____, _____, and ____

Answer 16

cycle account objective

Question 17

T/F an auditor is negligent if the results of the preceding years audit are included in the development of the current years audit program

Answer 17

F negligent if the results are not included

Question 18

when discussing the makeup of the population , what are 4 examples of items requiring a higher inherent risk ?

Answer 18

1. traqnsactions with affiliated companies 2. amounts due from officers 3. cash disbursements made payable to cash 4. A/R outstanding for several months

Question 19

inherent risk is most likely to vary from business to business for accounts such as ? (5)

Answer 19

1. A/R 2. Inventory 3. loans receivable 4. investments 5. PPE

Question 20

if the auditor found no misstaement for the past several years in conducting tests of an audit area, the auditor is justified in doing what to inherent risk?

Answer 20

reducing it provided that changes in relevant circumstatnces have not occurred

Question 21

T/F the profession hasn’t established standards or guidlines for setting inherent risk

Answer 21

T

Question 22

the nature of the clients business should have little to no effect on inherent risk for accounts such as (3)?

Answer 22

1. cash 2. notes 3. mortgages payable

Question 23

why do related party transactions cause an increase in inherent risk?

Answer 23

because they are not dealing at arms length so a greater likelyhood exists that they might be misstated or inadequately disclosed