Chapter 4: Management Fraud and Audit Risk Flashcards
What is audit risk?
the probability that an audit team will express an inappropriate audit opinion when the finanical statements are materially misstated
A management assertion that has a reasonable possibility of containing a material misstatement without regard to the effect of internal controls is considered a ______ assertion.
relevant
Which type of risk is the susceptibility of the account to misstatement?
inherent risk
The probability that the client’s internal control activities will fail to prevent or detect material misstatements provided they enter or would have entered the accounting system is ______ risk.
control
What’s another name for residual risk?
detection risk
Tests of details and analytical procedures which study plausible relationships are the two categories of ____ ______.
substantive procedures
For a cash account, which is riskier? Existence or Completeness
existence
For accounts payable, which is riskier? Existence or Completeness
completeness
A higher assessed risk of material misstatement for a relevant assertion being audited ______ detection risk.
reduces
T/F: Detection risk is based on the desired level of audit risk and assessed levels of inherent and control risk
True
T/F: The desired level of audit risk is based on the assessed level of inherent, control, and detection risk
False
T/F: Detection risk is the amount of risk the auditor can allow
True
T/F: Detection risk is calculated and derived from other risks
True
T/F: Detection risk determines the overall level of audit risk
False
Audit risk determines the overall level of detection risk
What are the two categories of substantive procedures?
- Tests of details
- Analytical procedures which study plausible relationships
Do most firms express their audit risk using quantitative or qualitative measures?
qualitative measures (high, medium, low)
Management fraud is sometimes referred to as ____ ____ ____.
fraudulent financial reporting
What is defined as “the theft of an entity’s assets and is often perpetrated by employees in relatively small or immaterial amounts” ?
misappropriation of assets
What is employee fraud?
the use of fraudulent means to misappropriate funds or other property from an employer
Employee fraud can be classified as either _____ or ______ .
- embezzlement
- larceny
What is embezzlement?
invovles employees or nonemployees wrongfully misappropriating funds entrusted in their care
What is larceny?
theft; misapropriation of funds or property not entrusted in ones care
What is another name for employee fraud, embezzlement, and larceny?
Defalcation
According to professional standards ______ __ underlies the entire audit process.
risk assessment
Intentional misstatements in financial statements to deceive financial statement users is the definition of ___ ___ ____ .
fraudulent financial reporting
What factors can be related to the susceptibility of accounts to misstatement or fraud? (5)
- dollar size of the account
- liquidity
- volume of transactions
- complexity of the transactions
- subjective estimates
What are related parties?
Individuals or organizations that can influence or be influenced by decisions of the company, possibly through family ties or investment relationships
The basis for executing and appropriate response to identified risks is ____ risk assessment.
inherent
Valuation of investment securities, deprecation, and net realizable value of accounts receivable are all examples of _____ _____.
accounting estimates
Risks that could adversely affect a company’s ability to achieve its objectives and execute its strategies are called ____ risks.
business
An auditor’s primary objective in regard to ____ ____ is to obtain the evidence needed to determineif transactions with them have been properly accounted for and disclosed in the financial statements.
related parties
When auditors develop an expectation about what an account balance should be and compare the expectation to the recorded analysis, the auditor is performing a preliminary ____ _____.
analytical procedure
On every audit engagement, the risk assessment process includes required ____ sessions in which critical audit areas are discussed.
brainstorming
At the preliminary stage, analytical procedures are ____ tests.
reasonableness
Auditors compare their expectation for each of the account balances with those recorded by management
T/F: Audit team brainstorming sessions are a required audit engagement component.
True
to discuss critical audit team issues
What are risks that require special audit consideration becuase of the nature or likelihood and potential magnitude of misstatement related to them?
significant risks
What is indirect-effect noncompliance?
violations of laws and regulations not directly connected to financial statements
What is direct-effect noncompliance?
produces direct and material effects on financial statement amounts
If the potential for fraud is high, auditors should perform _____ _____, including targeting tests towards higher risk areas, and performing more tests of transactions at year end, rather than interim points.
extended procedures
A violation of pension laws or government contract regulations is an example of ____ ____ noncompliance.
direct-effect
