chap 9 audit risk model

Question 1

why are internal controls ignored in setting inherent risk?

Answer 1

because they are considered separately in the audit risk model as control risk

Question 2

acceptable audit risk is a measure of how willing the auditor is to accept that the FSs may be materially misstated when?

Answer 2

after the audit is completed and an unmodified opinion has been issued

Question 3

assessments for inherent risk are typically based on what 3 things?

Answer 3

1. discussions with management 2. knowledge of the company 3. results in audits of previous years

Question 4

the audit risk model helps auditors decide what?

Answer 4

how much and what type of evidence to accumulate for each relevant audit objective

Question 5

measures the auditors assessment of the susceptibility of an assertion to material misstatement , before considering the effectiveness of related internal controls. what risk is this?

Answer 5

inherent risk

Question 6

measures the auditors assessment of the risk that a material misstatement could occur in an assertion and not be prevented or detected on a timely basis by the clients internal controls. what risk is this?

Answer 6

control risk

Question 7

what is planned detection risk?

Answer 7

the risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality

Question 8

the relationship between control risk and substantive evidence is direct/inverse

Answer 8

direct

Question 9

T/F when an audit area has higher inherent risk, auditors commonly assign more experienced staff to that area and review the completed audit tests more thoroughly

Answer 9

T

Question 10

when employing the audit risk model, there is a _____ relationship between acceptable audit risk and planned detection risk

Answer 10

direct

Question 11

auditors of larger public companies choose to rely extensively on effective controls. why?

Answer 11

becuase they must test the effectiveness of internal control over finanical reporting to satisy the Sarbanes Oxley act requirements.

Question 12

before auditors can set control risk to less than 100 percent, what are 3 things they must do

Answer 12

1. obtain an understanding of internal control 2. evaluate how well it should function based on the understanding 3. test the internal controls for effectivness

Question 13

the more effective internal controls, the lower the ____ ____ that can be assigned to control risk

Answer 13

risk factor

Question 14

acceptable audit risk of 2% is tghe same as audit assurance of ?

Answer 14

98%

Question 15

evaluating how well internal controls should function and testing internal controls for effectiveness are only required when?

Answer 15

the auditor assesses control risk below maximum risk factor (100%)

Question 16

a measure of how willing the auditor is to accept that the FSs may be materially misstated after the audit is completed and an unmodified opinion has been issued what kind of risk is this?

Answer 16

acceptable audit risk

Question 17

what is control risk?

Answer 17

measures the auditors assessment of the risk that a material misstatement could occur in an assertion and not be prevented or detected on a timely basis by the clients internal controls

Question 18

audit assurance or it’s equivalents is the ____ of acceptable audit risk

Answer 18

complement or 1- acceptable audit risk

Question 19

T/F the auditor will consider differences in risk levels across various audit objectives within an individual class of transactions

Answer 19

T

Question 20

what does a planned detection risk of 5% mean?

Answer 20

that the auditor plans to accumulate evidence until the risk of misstatements exceeding performance materiality is reduced to 5 percent

Question 21

what are the important distinctions in how the auditor assesses the 4 risk factors in the audit risk model

Answer 21

acceptable audit risk- auditor decided the risk the CPA firm is willing to take that the FSs are misstated after the audit is completed based on certain client related factors inherent and control risk are based on auditors expectations or predictions of client conditions detection risk is dependent completely on the other 3 risks

Question 22

the relationship between control risk and planned detection risk is direct/inverse

Answer 22

inverse

Question 23

how much and what type of evidence to accumulate for each relevant audit objective is the objective of what model?

Answer 23

audit risk model

Question 24

the risk of material misstatement reflects the combined effect of what? (2)

Answer 24

inherent and control risk

Question 25

inherent risk measures the auditors assessment of the susceptibility of an assertion to material misstatement , before considering what?

Answer 25

the effectiveness of related internal controls

Question 26

what is inherent risk?

Answer 26

measures the auditors assessment of the susceptibility of an assertion to material misstatement , before considering the effectiveness of related internal controls

Question 27

inherrent risk is inversely related to what? directly related to what?

Answer 27

inversely related to planned detection risk directly related to evidence

Question 28

auditors use the audit risk model to further identify what?

Answer 28

the potential for misstatements in the overall FSs and at the audit objective level for specific account balances, classes of transactions, and disclosures wehre mistatements are most likely to occur

Question 29

auditors of companies other than large public companies as well auditors of other types of entities are likely to realy on controls that are effective, especially when what?

Answer 29

day to day transaciton processing involves highly automated procedures

Question 30

the audit risk model is usually stated as what equation?

Answer 30

planned detection risk = acceptable audit risk/(inherent risk * control risk)

Question 31

control risk measures the auditors assessment of the risk that a material misstatement could occur in an assertion and also what?

Answer 31

not be prevented or detected on a timely basis by the clients internal controls

Question 32

why can the auditor increase planned detection risk when controls are effective?

Answer 32

because effective internal controls reduce the likelihood of missatements int he FSs

Question 33

the risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality

Answer 33

planned detection risk

Question 34

what are the terms auditors use instead of acceptable audit risk? (3)

Answer 34

1. audit assurance 2. overall assurance 3. level of assurance

Question 35

T/F the auditor may make a combined assessment of the risk of material missatements or the auditor can separately assess inherent risk and control risk

Answer 35

T

Question 36

what is acceptable audit risk?

Answer 36

a measure of how willing the auditor is to accept that the FSs may be materially misstated after the audit is completed and an unmodified opinion has been issued

Question 37

auditors use the audit risk model to further identify the potential for misstatements in the overall FSs and at the audit objective level for what?

Answer 37

specific account balances, classes of transactions, and disclosures wehre mistatements are most likely to occur

Question 38

what are the 2 key points to know about planned detection risk?

Answer 38

1. it is dependent on the other 3 factors in the model (acceptable audit risk, control risk, inherent risk) and only changes if one of the other 3 changes 2. it determines the amount of substantive evidence that the auditor plans to accumulate inversely with the size of the of the planned detection risk.

Question 39

T/F the audit risk model shows that inherent and control risk doesn’t have a close relationship

Answer 39

F they do have a close relationship

Question 40

T/F obtaining an understanding of internal control is not required for all audits

Answer 40

F

Question 41

it is common for auditors to want an equally low likelihood of missatements for each cycle after the audit is finished to permit what?

Answer 41

the issuance of an unmodified opinion audit report

Question 42

risk meel assessments may be quantitative or nonquantiative but most firms prefer? why?

Answer 42

nonquantitative assessments of risk (ex. low, moderate, high) due to the difficulty in precisely quantifying measures of risk

Question 43

planned detection risk is the risk that audit evidence for an audit objective will fail to detect misstatements exceeding what?

Answer 43

performance materiality

Question 44

when employing the audit risk model, there is a _____ relationship between acceptable audit risk and planned evidence

Answer 44

inverse

Question 45

the auditor assesses risks at the overall FS level and at what level?

Answer 45

audit objective level