Chapter 4 Flashcards
What 2 concepts are pervasive in the application of GAAS, particularly the standards of fieldwork and reporting?
Materiality & Audit Risk
The statement that the audit obtains “Reasonable Assurance” indicates the existence of what?
Audit Risk
What two components make up Risk of Material Misstatement (RMM)?
Control Risk + Inherent Risk
As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to…
Find Smaller Errors
Company management falsifies inventory count tags, therby overstating ending inventory and understating cost of sales is an example of what?
Fraudulent Financial Reporting
Fraud involving Senior Management should be reported to who?
The Audit Committee
The risk that an auditor’s procedures will lead to a conclusion that a material misstatement in an account balance does not exist when, in fact, a misstatement does is known as what?
Detection Risk
What are three ways that an auditor obtains an understanding of the entity and its environment
1) Inquiries of Management
2) Analytical Procedures
3) Observations and Inspections
Evaluations of financial information made through analysis of plausible relationships among both financial and non-financial data.
Analytical Procedures
Specific acts performed by the auditor in gathering evidence to determine if specific assertions are being met.
Audit Procedures
Risk that a misstatement could occur in an assertion about a class of transactions, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.
Control Risk
The risk that the auditor is exposed to financial loss or damage to his or her professional reputation from litigation, adverse publicity, or other events arising in connection with financial statements audited and reported on.
Engagement Risk
Unintentional misstatements or omissions of amounts or disclosures.
Errors
Intentional misstatements that can be classified as fraudulent financial reporting and/or misappropriation of assets.
Fruad
Nature, timing, and extent of the Audit
Scope of the Audit
What is the 3 components of the Fraud Risk Triangle
1) Incentive or Pressure
2) Opportunity
3) Rationalization or Attitude
What steps does the auditor perform to identify Fraud?
1) Discussion with audit team
2) Inquire management and others of the entity
3) Consider unusual relationships identified in planning
4) Understand period-end closing process and unexpected period-end adjustments.
What is the Audit Risk Equation?
AR = (IR x CR) x DR
Detection Risk has what type of relationship with Inherent and Control Risk?
Inverse
How much control does the auditor have over Risk of Material Misstatement?
Little or no control
Risk of Material Misstatement before considering Internal Controls
Inherent Risk
Auditors must consider fraud risk involving what class of transaction per audit standards?
Revenue Recognition
Engagement Risk is the Auditor’s exposure to loss or injury of his or her reputation from events arising in connection with financial statements audited (T/F).
True
Client Risk includes Inherent and Control Risk (T/F).
True
When assessing the risk of material misstatement, auditors evaluate the reasonableness of an entity’s accounting estimates. An auditor normally would be concerned about assumptions that are…
Susceptible to Bias
The acceptable level of detection risk is inversely related to the…
Extent of Substantive Procedures
When an auditor increases the assessed level of risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase what?
Extent of Substantive Procedures
In general, material frauds perpetrated by who are the most difficult to detect?
Controller
Name the situations that cause an increase in opportunity for management to commit fruad
- Significant related party transactions
- Management is dominated by a single person
- The financial statements included highly subjective estimates
An auditor learns that a client’s employee in control of inventory gets divorced and is responsible for paying large amount of child support. What risk would not be affected by the situation?
Detection Risk
The auditor can respond to an increased risk of fraud by doing what?
- Assign more experienced staff to the audit
- Obtain more reliable evidence
- Emphasizing professional skepticism
Two types of misstatements
- Known
2. Likely
