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Audit & Assurance > Chapter 4 - Fraud and Audit Risk > Flashcards

Chapter 4 - Fraud and Audit Risk Flashcards

1
Q

audit risk is the..

A

risk of giving a “clean” opinion when the F/S are actually materially misstated

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2
Q

the components of audit risk

A
  1. inherent risk
  2. detection risk
  3. control risk
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3
Q

what risks do auditors have no control over?

A

inherit and control

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4
Q

inherent risk is..

A

the risk that material misstatement exists in the absence of controls

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5
Q

three factors that affect inherent risk

A
  1. nature of client’s business to achieve competitive advantage
  2. types of transactions
  3. effectiveness and integrity of managers and accountants
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6
Q

three factors that affect control risk

A
  1. control environment
  2. the existence and effectiveness of controls
  3. monitoring activities
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7
Q

detection risk is the..

A

likelihood that the auditors substantive procedures will fail to detect MM

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8
Q

three factors that affect detection risk

A
  1. nature, timing, and extent of audit procedures
  2. sampling risk
  3. no sampling risk: the risk that auditors may reach an inappropriate conclusion based upon available evidence
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9
Q

high RMM =

A

more work

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10
Q

lower RMM =

A

less work

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11
Q

high controls risk =

A

more work

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12
Q

when more work has to be done, we adjust…

A

nature timing and extent

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13
Q

2 types of testing

A
  1. analytical
  2. detail
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14
Q

analytical testing is more…

A

efficient

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15
Q

detail testing is more…

A

effective

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16
Q

The difference between fraud and error is…

A

intent

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17
Q

three categories of factors that might indicate an increased risk of fraudulent FR

A
  1. management’s characteristics and influence
  2. industry conditions
  3. operating characteristics and financial stability
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18
Q

larceny is..

A

simple theft

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19
Q

defalcation is another name for..

A

larceny, employee fraud, and embezzlement

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20
Q

Financial statement fraud has ____ frequency and ____ damage and loss

A

low, high

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21
Q

asset fraud has ____ frequency and ____ damage and loss

A

high, low

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22
Q

what are the top 3 ways of detecting fraud?

A
  1. hotline
  2. internal audits
  3. internal controls
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23
Q

inherit risk refers to…

A

the exposure or susceptibility of an assertion within an entity’s financial statements to a MM without regard to internal controls

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24
Q

Misstatement by assertion: invalid transactions reported

A

occurrence

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25
Q

Misstatement by assertion: valid transactions are omitted from the financial statements

A

completness

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26
Q

Misstatement by assertion: transaction amounts are inaccurate

A

accuracy

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27
Q

Misstatement by assertion: transactions are classified into the wrong accounts

A

classifications

28
Q

to identity risks, you must understand the clients…

A

business

29
Q

information sources are used to..

A

understand the client’s business

30
Q

general business sources examples

A

business magazines, trade journals

31
Q

company source examples

A

partnership agreements, bylaws, contracts, meeting minutes

32
Q

three information sources used

A
  1. general business
  2. company source
  3. info from past audits
33
Q

preliminary analytical procedures help…

A
  1. identify potential problem areas
  2. provide a standard starting place to start examining the f/s
  3. help familiarize auditor with client
34
Q

when are auditors required to perform preliminary analytical procedures

A

planning stage

35
Q

how many steps are there to completing analytical procedure?

A

five

36
Q

5 steps to completing primary analytical procedures

A
  1. develop an expectation
  2. define a significant difference
  3. compare expectations with the recorded amounts
  4. investigate significant difference
  5. document each of the preceding steps
37
Q

analytical procedures can be and are used for…

A

substantive testing

38
Q

audit team brainstorming discussions are a….

A

required procedure

39
Q

audit team brainstorming discussions objectives are to gain understand of…

A

previous client experiences, how fraud may be concealed in the entity, procedures that might detect fruad

40
Q

audit team discussions set the..

A

proper tone for the audit

41
Q

discussions are ______ in the engagement

A

ongoing

42
Q

inquiries typically are a…

A

set of questions that you sit down and talk about

43
Q

the assessment of inherent risk needs to occur for…

A

each significant financial statement account and disclosure

44
Q

the auditor should evaluate _____ associated with the financial statement account or disclosure

A

qualitative and qualitative

45
Q

after significant accounts and disclosures have been identified, the auditor needs to…

A

identify the relevant financial assertion

45
Q

a financial statement is significant if…

A

it has a reasonable possibility of containing a misstatement that would cause the financial statements to be materially misstated

46
Q

“what could go wrong?” cash significant assertions

A

existence, valuation, presentation, disclosure

47
Q

“what could go wrong?” A/R significant assertions

A

existence, completeness, valuation

48
Q

cash existence could be…

A

embezzlement

49
Q

cash valuation could be…

A

foreign currency

50
Q

cash presentation could be…

A

restricted cash

51
Q

presume that improper revenue recognition is a…

A

fraud risk

52
Q

identify risks of management…

A

override controls

53
Q

to identify risks of management override of controls we…

A

examine Jesus and other adjustments, review accounting estimates for biases, and evaluate business rationale for significant unusual transactions

54
Q

SIGNIFICANT risks are..

A

risks that require special audit consideration because of the nature of the risk or the likelihood or potential of material misstatement

55
Q

evidence of fraud must be communicated to who usually?

A

someone one level above

56
Q

any fraud committed by management is…

A

material

57
Q

any fraud committed by management should be communicated to who?

A

those charged with governance

58
Q

direct effect non-compliance produce…

A

direct and material effects on financial statements

59
Q

Auditors responsibility for direct noncompliance is to…

A

design procedures to provide reasonable assurance

60
Q

indirect-effect non-compliance are…

A

not related to specific amounts or disclosures on the financial statements

61
Q

auditors responsibility for non direct noncompliance is to…

A

follow up on suspected violations material to financial statements

62
Q

audit strategy memorandum is basically…

A

a long planning memo

63
Q

the auditor establishes an overall audit strategy that sets the…

A

scope, timing, and direction for auditing each relevant assertion

64
Q

the audit strategy is a result of the..

A

risk model

65
Q

in establishing the overall audit strategy, auditors should consider…

A
  1. reporting objectives and communications required
  2. auditor’s risk assessment
  3. other requirements of laws and regulations
66
Q

memo is basis for…

A

preparing detailed audit plans

Audit & Assurance (12 decks)

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