Chapter 4

Question 1

(blank) could adversely affect companies ability to acheive objecties and execute strategies
* uncertainties from the businesses environement (economy,competitors, regulators, customers, suppliers, investors, etc) that managers tor try mitigate with controly activities

Answer 1

Business (inherent) Risks

Question 2

Enterprise Risk Management (ERM) Framework

Answer 2

• Interal Environment
• Objective Setting
• Event Identification
• Risk assessment
• Risk Repsonse
• Control Activities
• Info and communicatino
• Monitoring

Question 3

Internal Environment

Answer 3

Risk conciousness of the organization

includes risk mgmt philosophy, risk appetite, integrity and ethical values, operating environment

Question 4

Mgmts repsonsibility to determine goals and objecties of the organization

Answer 4

objective setting

Question 5

Identification of conditions and events that could adversely affect mgmts objectives

Answer 5

event identification

Question 6

Systematic process for estimating the likelihood of sdverse conditions occuring

Answer 6

Risk assessment

Question 7

How organization will prevent or repsond to the adverse conditions if they actually occur

Answer 7

Risk Response

Question 8

Policies and procedures to ensure that risk repsonses are appropriate given the circumstances nad environment which the organization operates

Answer 8

control activities

Question 9

(blank) links all components of the ERM

Answer 9

information and communication

Question 10

Regular mgmt and supervisory activities over risk mgmt activites to make sure they remain in place and operate effectively

Answer 10

Monitoring

Question 11

The probability that the info distributed by an entity will be materially false and misleading

Answer 11

Information Risk

Question 12

Deliberate fraud committed by mgmt that injures investors and greditors through materially misstated info

Answer 12

MGMT Fraud

(fraudulent finan reporting)

Question 13

The probability that in the absence of internal controls, material errors or frauds could enter the acct system used to develop finan statements

Answer 13

Inherent Risk

Question 14

Probability that the clients internal control activities will fail to prevent or detect material misstatemnts provided they entered the acct system in the first place

Answer 14

Control Risk

Question 15

Probability that audit procedures will fail to detect material misstatements provided that any entered the acct system in the first place

Answer 15

Detection Risk

Question 16

Audit Risk Model

Answer 16

AR = IR x CR x DR

Question 17

Risk of Materal Misstatement

Answer 17

Inherent Risk and Control Risk

Auditor assesses, noncontrollable

Question 18

Inverse relationship between the RMM & detection risk

Answer 18

if RMM increases detection risk decreases

Question 19

Detection Risk nature timing and extent

Lower DR allowed

Answer 19

Nature - more effective tests

Timing - testing at EOY

Extent - more tests

Question 20

Detection Risk Nature Timing and Extent

Higher DR allowed

Answer 20

Nature - less effective tests

Timing - testing at interim

Extent - Fewer Tests

Question 21

Audit risk can NEVER be?

Answer 21

Zero

Question 22

Factors related to succeptibility of accounts to misstatement or fraud

Answer 22

• Dollar size of account
• liquidity
• volume of transactions
• complexity of transactions
• subjective estimates

Question 23

Five steps when completing analytical procedures

Answer 23

1. Develop an expectation
2. define a significan difference
3. compare expectaion with recorded amount
4. investigate significan differences
5. docmument the preceding steps

Question 24

Discussion of previous experiences with the client, how a fraud might be perpetrated and concealed and procedures that might detect fraud (Required by standards)

Answer 24

Brainstorming

Question 25

Enterprise risk mgmt is the repsonsibility of

Answer 25

Company mgmt

Question 26

Failure to meet companys objectives is a result of

Answer 26

Business Risk

Question 27

One typical characteristic of mgmt fraud is

Answer 27

Vicitimization of investors through the use of materially misleading financial statements

Question 28

Likelihood that material missatatmens may have entered the accounting system and not been detected and correced by clients internal control is referred to as

Answer 28

Risk of Material Misstatement

Question 29

Specific procedural repsonse to a particual fraud risk in an acct balance or class of transactions

Answer 29

Performing procedures such as inventory observationand cash counts on a surprise basis

Question 30

Analytical procedures are generally used to produce evidence from

Answer 30

relationships among current finan balances and prior balances, forecasts, and nonfinancial data

Question 31

Source of info for comparison of current balances with expected balances

Answer 31

Companys budget and forecast

Question 32

Analytical procedures can be used in the following ways

Answer 32

* A means of overall review at end of audit * attention directing methods when planning audit at beginning * a substantive audit prcedures to obtain evidence during an audit

Question 33

When planning an audit analytical procedures should concentrate on

Answer 33

accounts and relationships that can represent specific potential problems and risks in the finan statements

Question 34

Auditors are not responsible for accounting estimates with respect to

Answer 34

making the estimates

Question 35

An audit strategy contains

Answer 35

specifications of procedures the auditors believe appropriate for the finan statements under audit

Question 36

Under GAAs it is acceptible to

Answer 36

assess risk of material misstatment at high and acheive acceptibly low audit risk by performing extensive detection work

Question 37

Private securities litigation reform act independ auditors are required to first

Answer 37

Report to SEC all instances of noncompliance they believe to havea material effect on finan statements if the bod doesnt first report to SEC

Question 38

When evaluating whenter accting estimates made by mgmt are reasonable auditors would be most interested in?

Answer 38

evidence of aggressive or conservative systematic bias

Question 39

The first concern of noncompliance is

Answer 39

Effect on Finan statements

Question 40

Auditors must design their tests to obtain reasonalbe assurance that all noncompliance with direct material statement effects are detected

Question 41

Purpose of performing analytcal procedures in the planning stages of an audit

Answer 41

identify unusual conditions athat deserve more auditing effort