Chapter 4

Question 1

What 2 concepts are pervasive in the application of GAAS, particularly the standards of fieldwork and reporting?

Answer 1

Materiality & Audit Risk

Question 2

The statement that the audit obtains “Reasonable Assurance” indicates the existence of what?

Answer 2

Audit Risk

Question 3

What two components make up Risk of Material Misstatement (RMM)?

Answer 3

Control Risk + Inherent Risk

Question 4

As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to…

Answer 4

Find Smaller Errors

Question 5

Company management falsifies inventory count tags, therby overstating ending inventory and understating cost of sales is an example of what?

Answer 5

Fraudulent Financial Reporting

Question 6

Fraud involving Senior Management should be reported to who?

Answer 6

The Audit Committee

Question 7

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?

Answer 7

Detection Risk

Question 8

What are three ways that an auditor obtains an understanding of the entity and its environment

Answer 8

1) Inquiries of Management
2) Analytical Procedures
3) Observations and Inspections

Question 9

Evaluations of financial information made through analysis of plausible relationships among both financial and non-financial data.

Answer 9

Analytical Procedures

Question 10

Specific acts performed by the auditor in gathering evidence to determine if specific assertions are being met.

Answer 10

Audit Procedures

Question 11

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.

Answer 11

Control Risk

Question 12

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.

Answer 12

Engagement Risk

Question 13

Unintentional misstatements or omissions of amounts or disclosures.

Answer 13

Errors

Question 14

Intentional misstatements that can be classified as fraudulent financial reporting and/or misappropriation of assets.

Answer 14

Fruad

Question 15

Nature, timing, and extent of the Audit

Answer 15

Scope of the Audit

Question 16

What is the 3 components of the Fraud Risk Triangle

Answer 16

1) Incentive or Pressure
2) Opportunity
3) Rationalization or Attitude

Question 17

What steps does the auditor perform to identify Fraud?

Answer 17

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.

Question 18

What is the Audit Risk Equation?

Answer 18

AR = (IR x CR) x DR

Question 19

Detection Risk has what type of relationship with Inherent and Control Risk?

Answer 19

Inverse

Question 20

How much control does the auditor have over Risk of Material Misstatement?

Answer 20

Little or no control

Question 21

Risk of Material Misstatement before considering Internal Controls

Answer 21

Inherent Risk

Question 22

Auditors must consider fraud risk involving what class of transaction per audit standards?

Answer 22

Revenue Recognition

Question 23

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).

Answer 23

True

Question 24

Client Risk includes Inherent and Control Risk (T/F).

Answer 24

True

Question 25

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…

Answer 25

Susceptible to Bias

Question 26

The acceptable level of detection risk is inversely related to the…

Answer 26

Extent of Substantive Procedures

Question 27

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?

Answer 27

Extent of Substantive Procedures

Question 28

In general, material frauds perpetrated by who are the most difficult to detect?

Answer 28

Controller

Question 29

Name the situations that cause an increase in opportunity for management to commit fruad

Answer 29

1. Significant related party transactions
2. Management is dominated by a single person
3. The financial statements included highly subjective estimates

Question 30

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?

Answer 30

Detection Risk

Question 31

The auditor can respond to an increased risk of fraud by doing what?

Answer 31

1. Assign more experienced staff to the audit
2. Obtain more reliable evidence
3. Emphasizing professional skepticism

Question 32

Two types of misstatements

Answer 32

1. Known

2. Likely