Chapter 3 Set 2 Flashcards
The company being audited has an internal auditor that is both competent and objective. The independent auditor wants to assign tasks for the internal auditor to perform. Under these circumstances, the independent auditor may:
When planning the audit, the auditor should consider the extent of involvement of the client’s internal auditors in the performance of the audit. Although they can be involved with tests of controls and of details (i.e., substantive tests), their involvement should generally be limited.
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?
An increase in the assessed level of control risk means that the assessed risk of material misstatement has also increased, and this requires a corresponding decrease in detection risk to maintain the same (presumably low) level of overall audit risk.
Increasing the extent of tests of details will result in a reduction in detection risk.
The auditor uses the assessed level of control risk (together with the assessed level of inherent risk) to determine?
the assessed risk of material misstatement, which in turn affects the acceptable level of detection risk for financial statement assertions
Control risk should be assessed in terms of?
The auditor identifies internal controls relevant to specific financial statement assertions, and then performs tests of controls to evaluate their effectiveness in preventing material misstatements in those assertions. Control risk should be assessed in terms of financial statement assertions.
The acceptable level of detection risk is inversely related to the?
The acceptable level of detection risk is inversely related to the assurance provided by substantive tests. For example, if the acceptable level of detection risk decreases, more assurance is required from substantive tests.
As the acceptable level of detection risk increases, the assurance (effectiveness) that must be provided from substantive tests can?
Decrease
As the acceptable level of detection risk decreases, the assurance directly provided from:
Substantive tests should increase
In a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following?
Inherent risk is the susceptibility of a relevant assertion to a material misstatement, assuming there are no related controls. CANNOT be changed by the auditor, exist independently of audit
What is detection risk?
the risk that the audit procedures implemented will not detect a misstatement that exists in a relevant assertion. CAN be changed by the auditor
What is control risk?
is the risk that a material misstatement will not be detected (or prevented) on a timely basis by the entity’s internal control. CANNOT be changed by the auditor, exist independently of audit
Calculation for Audit Risk?
Audit Risk (should be low) = Risk of Material Misstatement (assessed by auditor) X Detection Risk (controlled by auditor)
What makes up Risk of Material Misstatement?
Inherent Risk X Control Risk
Under which of the following circumstances should an auditor consider confirming the terms of a large complex sale?
The auditor would consider confirming a large complex sale when the risk of material misstatement (RMM) is high. The risk of material misstatement includes both inherent risk and control risk. If both inherent risk and control risk are high, then RMM is high and the auditor would minimize detection risk by performing more reliable auditing procedures, such as confirmation of the terms of large complex sale.
While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?
Numerous unexpected errors would result in an increase in the assessment of risk. An increase in risk of material misstatement would result in a decrease in detection risk, which means the assurance provided from substantive procedures should increase. Performing testing at year-end as well as utilizing more experienced audit team members to perform those tests would be an appropriate response.
Which of the following matters relating to an entity’s operations would an auditor most likely consider as an inherent risk factor in planning an audit?
The auditor would most likely consider derivative transactions as an inherent risk factor. Derivative transactions entered into as hedges may result in an increased assessment of inherent risk. For example, derivatives entered into as hedges may involve complex calculations and/or may be based on accounting estimates that are subject to significant measurement uncertainty.
