Chapter 4 Terms

Question 1

Analytical Procedures

Answer 1

Evalutions of financial information made through analysis of plausible relationships among both financial and nonfinancial data

Question 2

Audit Data analytics

Answer 2

Using analysis, modeling and visualization to discover and analyze patterns, anomalies and other information in data in the contact of the audit

Question 3

Audit Procedures

Answer 3

Specific acts performed by the auditor in gathering evidence to determine if specific assertions are materially misstated

Question 4

Audit risk

Answer 4

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated

Question 5

Business Risk

Answer 5

A risk resulting from significant conditions, events, circumstances and action or inactions that could adversely affect an entity’s ability to achieve its objectives and execute its strategies or from the setting of inappropriate objectives and strategies

Question 6

Control Risk

Answer 6

The risk that a misstatement that could occur in an assertion about an account 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 internal control

Question 7

Detection Risk

Answer 7

The risk that the procedures performed by the auditor will not detect a misstatement that exists and that could be material

Question 8

Engagement risk

Answer 8

The risk that the auditor is exposed to financial loss or damange to his or her professional reputation from litigation, adverse publicity or other events arising in connection with financial statements audited and reported on

Question 9

Errors

Answer 9

Unintentional misstatements or omissions of amounts or disclosures

Question 10

Factual Misstatements

Answer 10

These are misstatements which is there no doubt

Question 11

Fraud

Answer 11

An intentional act by one or more among management, those charged with governance, employees or 3rd parties, involving the use of deception that results in a misstatement in the financial statements

Question 12

Inherent Risk

Answer 12

The susceptibility of an assertion in an account or disclosure to a misstatement due to error/fraud that could be material before consideration of any related controls

Question 13

Judgmental Misstatements

Answer 13

These are misstatements that arise from the judgments of management concerning accounting estimates that the auditor considers unreasonable or the selection or application of accounting policies that the auditor considers inappropriate

Question 14

Misstatement

Answer 14

A difference between the amount, classification, presentation or disclosure of a reported financial statement item and its requires for the item to be presented fairly in accordance with the applicable financial reporting framework

Question 15

Nonsampling Risk

Answer 15

The risk that auditors will make judgment errors caused by the use of inappropriate audit procedures or misinterpretation of audit evidence and failure to recognize a misstatement or deviation

Question 16

Projected misstatements

Answer 16

These ae the auditor’s best estimate of misstatements in populations, involving the projection of misstatements identified in an audit sample to the entire population from which the sample was drawn

Question 17

Risk assessment

Answer 17

The identification, analysis, and management of risks relevant to the preparation of financial statements that ae fairly presented in conformity with GAAP

Question 18

Risk of material misstatement

Answer 18

The risk that the financial statements are materially misstated prior to the audit. it represents the combination of inherent risk and control risk

Question 19

Significant Risk

Answer 19

An identified risk of material misstatement (1) for which the assessment of inherent risk is close to the upper end of the spectrum of inherent risk due to the degree to which inherent risk factors affect the combination of the likelihood of a misstatement occurring and the magnitude of the potential misstatement should that misstatement occur, or (2) that is to be treated as a significant risk in accordance with the requirements of other auditing standards.

Question 20

Which of the following is not a misstatement of the financial statements?

A. The entity uses different inventory accounting methods for internal and external reporting.

B. A departure from GAAP.

C. The footnote for pensions is omitted.

D. A clerk incorrectly based the allowance for doubtful accounts on 31% of sales as opposed to 13% of sales as determined by the controller.

Answer 20

A. The entity uses different inventory accounting methods for internal and external reporting.

Question 21

Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity’s financial statements?

A. Accounts receivable confirmation requests yield significantly fewer responses than expected.

B. Audit trails of computer-generated transactions exist only for a short time.

C. The chief financial officer does not sign the management representation letter until the last day of the auditor’s fieldwork.

D. Management consults with other accountants about significant accounting matters.

Answer 21

A. Accounts receivable confirmation requests yield significantly fewer responses than expected

Question 22

Under Auditing Standards, which of the following would be classified as an error?

A. misappropriation of assets for the benefit of management

B. misinterpretation by management of facts that existed when the financial statements were prepared

C. preparation of records by employees to cover a fraudulent scheme

D. intentional omission of the recording of a transaction to benefit a third party

Answer 22

B. misinterpretation by management of facts that existed when the financial statements were prepared

Question 23

As the acceptable level of detection risk decreases, the assurance directly provided from:

A. substantive procedures should increase.

B. substantive procedures should decrease.

C. tests of controls should increase.

D. tests of controls should decrease.

Answer 23

A. substantive procedures should increase.

Question 24

Which of the following is correct concerning required auditor communications about fraud?

A. Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.

B. Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission.

C. Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor.

D. The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities.

Answer 24

A. Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.

Question 25

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 the:

A. extent of tests of controls.

B. level of detection risk.

C. extent of substantive tests.

D. level of inherent risk.

Answer 25

C. extent of substantive tests.

Question 26

What is the #1 cause of Risk?

Answer 26

Change

Question 27

What is the #1 Fraud Red Flag?

Answer 27

Complexity

Question 28

2 types of mistakes

Answer 28

1. Rejection of the Truth
2. Acceptance of a Lie

Question 29

Audit Risk Model Formula

Answer 29

AR = IR x CR x DR

Question 30

Fraud Triangle

Answer 30

Opportunity, Pressure/Incentive, Rationalization/Justification

Question 31

Major opportunity factors

Answer 31

Lack of controls, poor controls, unenforced controls

Question 32

Transactions should be

Answer 32

valid, properly authorized, complete, properly classified, reported in the proper period, properly valued, summarized correctly

Question 33

Most Basic control activities

Answer 33

Segregation of duties

Question 34

Fraud Sqaure Model

Answer 34

Opportunity, Pressure/Incentive, Rationalization/Justification and ability

Question 35

Fraud Baseball Diamond

Answer 35

Opportunity, Pressure/Incentive, Rationalization/Justification, Ability and Psyche