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Auditing Exam 3 > Chapter 9: Assessing the Risk of Material Misstatement > Flashcards

Chapter 9: Assessing the Risk of Material Misstatement Flashcards

1
Q

Which of the following would notincrease the risks of material misstatement at the overall financial statement level?

A) effective oversight by the board of directors

B) deficiencies in management’s integrity

C) inadequate accounting systems

D) all of the above

A

A) effective oversight by the board of directors

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2
Q

The auditor’s responsibility section in an audit report states that “…the standards require that we plan and perform the audit to obtain ________ assurance about whether the financial statements are free of material misstatement.” What type of assurance is given?

A) immediate

B) limited

C) reasonable

D) absolute

A

C) reasonable

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3
Q

________ risk represents the auditor’s assessment of the susceptibility of an assertion to material misstatement, before considering the effectiveness of the client’s internal control.

A) Material

B) Account balance

C) Control

D) Inherent

A

D) Inherent

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4
Q

Risk of material misstatement at the assertion level

A) is only relevant to account balances.

B) determines the nature, timing, and extent of further audit procedures.

C) refers to risks that are pervasive to the financial statements as a whole.

D) consists of business risk and inherent risk.

A

B) determines the nature, timing, and extent of further audit procedures.

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5
Q

The risk of material misstatement exists only at the overall financial statement level.

TRUE OR FALSE

A

FALSE

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6
Q

Significant changes in the industry may increase the risk of material misstatement at the assertion level.

TRUE OR FALSE

A

FALSE

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7
Q

Inherent risk and control risk exist independent of the audit of the financial statements.

TRUE OR FALSE

A

TRUE

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8
Q

Risk assessment procedures include inquiries of management and others by the auditor. As part of these procedures, the auditor should talk to

A) internal auditors.

B) board of directors.

C) individuals involved with regulatory compliance.

D) all of the above.

A

D) all of the above.

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9
Q

Risk assessment procedures include

A) a required discussion among the staff members of the audit and the client regarding material misstatements in the financial statement.

B) determination of the type of audit opinion to issue.

C) observation of the entity’s operations.

D) assessing acceptable audit risk.

A

C) observation of the entity’s operations.

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10
Q

Risk assessment procedures are performed to identify and assess the risk of material misstatement. List three risk assessment procedures.

A
  • Inquiries of management and others within the entity
  • Analytical procedures
  • Observation and inspection
  • Discussion among engagement team members
  • Other risk assessment procedures, including discussions with predecessor auditor, evidence obtained during other procedures performed for the client
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11
Q

The performance of risk assessment procedures is designed to help the auditor obtain an understanding of the entity.

TRUE OR FALSE

A

TRUE

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12
Q

Auditing standards require the engagement partner to be included in discussions about the susceptibility of the client’s financial statements to material misstatements.

TRUE OR FALSE

A

TRUE

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13
Q

Auditors are notallowed to make inquires of employees who are notconsidered management, such as marketing or sales personnel.

TRUE OR FALSE

A

FALSE

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14
Q

When considering the risk of misstatement due to fraud,

A) the risk of not detecting a material misstatement due to fraud is lower than the risk of not detecting a misstatement due to error.

B) the risk is only made at the financial statement level.

C) auditing standards require the auditor to presume that risk of fraud exist in expense transactions.

When considering the risk of misstatement due to fraud,

A) the risk of not detecting a material misstatement due to fraud is lower than the risk of not detecting a misstatement due to error.

B) the risk is only made at the financial statement level.

C) auditing standards require the auditor to presume that risk of fraud exist in expense transactions.

D) auditing standards outline procedures the auditor should perform to obtain information from management about their consideration of fraud.

A

D) auditing standards outline procedures the auditor should perform to obtain information from management about their consideration of fraud.

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15
Q

Individuals engaged in conducting a fraud will generally notmisrepresent information to the auditor.

TRUE OR FALSE

A

FALSE

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16
Q

The auditor’s risk assessment for fraud should be ongoing throughout the audit.

TRUE OR FALSE

A

TRUE

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17
Q

A ________ risk represents an identified and assessed risk of material misstatement that, in the auditor’s professional judgment, requires special audit consideration.

A) material

B) substantial

C) financial statement

D) significant

A

D) significant

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18
Q

Which of the following will generally be considered a significant risk?

A) a sale to a customer

B) the determination of the amount of bad debt expense

C) the purchase of inventory

D) obtaining a loan from the bank

A

B) the determination of the amount of bad debt expense

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19
Q

Significant risks often relate to routine transactions.

TRUE OR FALSE

A

FALSE

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20
Q

The auditor must perform substantive tests related to assertions deemed to have significant risks.

TRUE OR FALSE

A

TRUE

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21
Q

Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would

A) increase materiality levels.

B) decrease detection risk.

C) decrease substantive testing.

D) increase inherent risk.

A

B) decrease detection risk.

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22
Q

When dealing with audit risk,

A) auditors cannot accept any level of risk in performing the audit function.

B) most risks that auditors encounter are relatively easy to measure.

C) the audit risk model is only used for classes of transactions.

D) the audit risk model helps the auditor to decide how much and what types of evidence to accumulate.

A

D) the audit risk model helps the auditor to decide how much and what types of evidence to accumulate.

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23
Q

The measurement of the auditor’s assessment of the susceptibility of an assertion to material misstatement, before considering the effectiveness of related internal controls is defined as

A) audit risk.

B) inherent risk.

C) sampling risk.

D) detection risk.

A

B) inherent risk.

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24
Q

The risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality levels is

A) audit risk.

B) control risk.

C) inherent risk.

D) planned detection risk.

A

D) planned detection risk.

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25
Q

If the auditor decides to reduce acceptable audit risk, planned detection risk

A) increases.

B) decreases.

C) stay the same.

D) cannot be determined.

A

B) decreases.

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26
Q

Inherent risk is ________ related to planned detection risk and ________ related to the amount of audit evidence.

A) directly; inversely

B) directly; directly

C) inversely; inversely

D) inversely; directly

A

D) inversely; directly

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27
Q

Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance instead of

A) detection risk.

B) audit report risk.

C) acceptable audit risk.

D) inherent risk.

A

C) acceptable audit risk.

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28
Q

If planned detection risk is reduced, the amount of evidence the auditor accumulates will

A) increase.

B) decrease.

C) remain unchanged.

D) be indeterminate.

A

A) increase.

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29
Q

Planned detection risk

I. determines the amount of substantive evidence the auditor plans to accumulate.

II. is dependent on inherent risk and business risk.

A) I only

B) II only

C) I and II

D) neither I nor II

A

A) I only

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30
Q

Inherent risk is often high for an account such as

A) inventory.

B) land.

C) capital stock.

D) notes payable.

A

A) inventory.

31
Q

Inherent risk and control risk

A) are inversely related to each other.

B) are inversely related to detection risk.

C) are directly related to detection risk.

D) are directly related to audit risk.

A

B) are inversely related to detection risk.

32
Q

To what extent do auditors typically rely on internal controls of their public company clients?

A) extensively

B) only very little

C) infrequently

D) never

A

A) extensively

33
Q

Auditors typically rely on internal controls of their private company clients

A) only as needed to complete the audit and satisfy Sarbanes-Oxley requirements.

B) only if the controls are determined to be effective.

C) only if the client asks an auditor to test controls.

D) only if the controls are sufficient to increase control risk to an acceptable level.

A

B) only if the controls are determined to be effective.

34
Q

Which is a true statement about audit risk?

A) Audit risk measures the risk that a material misstatement could occur and not be detected by internal control.

B) When auditors decide on a higher acceptable audit risk, they want to be more certain that the financial statements are not materially misstated.

C) Audit assurance is the complement of acceptable audit risk.

D) There is an inverse relationship between acceptable audit risk and planned detection risk.

A

C) Audit assurance is the complement of acceptable audit risk.

35
Q

The risk of material misstatement refers to

A) control risk and acceptable audit risk.

B) inherent risk.

C) the combination of inherent risk and control risk.

D) inherent risk and audit risk.

A

C) the combination of inherent risk and control risk.

36
Q

When assessing risk, it is important to remember that

A) for acceptable audit risk, the SEC decides the risk the CPA firm should take for public clients.

B) inherent risk can be changed by the auditor.

C) detection risk can only be determined after audit risk, inherent risk, and control risk are determined.

D) control risk is determined by company management since they are responsible for internal control.

A

C) detection risk can only be determined after audit risk, inherent risk, and control risk are determined.

37
Q

Which of the following is a correct relationship?

A) Acceptable audit risk and planned detection risk have an inverse relationship.

B) Control risk and planned detection risk have a direct relationship.

C) Planned detection risk and inherent risk have an inverse relationship.

D) All of the above are correct relationships.

A

C) Planned detection risk and inherent risk have an inverse relationship.

38
Q

In a financial statement audit, inherent risk is evaluated to help an auditor asses which of the following?

A) the internal audit department’s objectivity in reporting a material misstatement of a financial statement assertion it detects to the audit committee

B) the risk the internal control system will not detect a material misstatement of a financial statement assertion

C) the risk that the audit procedures implemented will not detect a material misstatement of a financial statement assertion

D) the susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls

A

D) the susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls

39
Q

Which of the following statements is nottrue?

A) Inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related to the amount of audit evidence required.

B) Inherent risk is directly related to evidence whereas detection risk is inversely related to the amount of audit evidence required.

C) Inherent risk is the susceptibility of the financial statements to material error, assuming no internal controls.

D) Inherent risk and control risk are assessed by the auditor and function independently of the financial statement audit.

A

A) Inherent risk is inversely related to the amount of audit evidence whereas detection risk is directly related to the amount of audit evidence required.

40
Q

An auditor who audits a business cycle that has low inherent risk should

A) increase the amount of audit evidence gathered.

B) assign more experienced staff to that area.

C) expand planning procedures.

D) do none of the above.

A

D) do none of the above.

41
Q

The most important element of the audit risk model is control risk.

TRUE OR FALSE

A

FALSE

42
Q

The audit risk model that must be used for planning audit procedures and evaluating audit results is:

TRUE OR FALSE

A

FALSE

43
Q

If acceptable audit risk is low, and inherent risk and control risk are both low, then planned detection risk should be high.

TRUE OR FALSE

A

TRUE

44
Q

If the audit assurance rate is 95%, then the level of acceptable audit risk is 5%.

TRUE OR FALSE

A

TRUE

45
Q

For a private company client, auditors are required to test any internal controls they believe have notbeen operating effectively during the period under audit.

TRUE OR FALSE

A

FALSE

46
Q

There is a direct relationship between acceptable audit risk and planned detection risk.

TRUE OR FALSE

A

TRUE

47
Q

Acceptable audit risk and the amount of substantive evidence required are inversely related.

TRUE OR FALSE

A

TRUE

48
Q

As control risk increases, the amount of substantive evidence the auditor plans to accumulate should increase.

TRUE OR FALSE

A

TRUE

49
Q

Inherent risk and control risk are directly related.

TRUE OR FALSE

A

FALSE

50
Q

Audit assurance is the complement of planned detection risk, that is, one minus planned detection risk.

TRUE OR FALSE

A

FALSE

51
Q

If an auditor believes the chance of financial failure is high and there is a corresponding increase in business risk for the auditor, acceptable audit risk would likely

A) be reduced.

B) be increased.

C) remain the same.

D) be calculated using a computerized statistical package.

A

A) be reduced.

52
Q

When management has an adequate level of integrity for the auditor to accept the engagement but cannotbe regarded as completely honest in all dealings, auditors normally

A) reduce acceptable audit risk and increase inherent risk.

B) reduce inherent risk and control risk.

C) increase inherent risk and control risk.

D) increase acceptable audit risk and reduce inherent risk

A

A) reduce acceptable audit risk and increase inherent risk.

53
Q

When the auditor is attempting to determine the extent to which external users rely on a client’s financial statements, they may consider several factors exceptfor

A) client size.

B) concentration of ownership.

C) nature and amounts of liabilities.

D) assessment of detection risk.

A

D) assessment of detection risk.

54
Q

________ is the risk that the auditor or audit firm will suffer harm after the audit is finished, even though the audit report was correct.

A) Inherent risk

B) Audit risk

C) Engagement risk

D) Control risk

A

C) Engagement risk

55
Q

If an auditor believes the client will have financial difficulties after the audit report is issued, and external users will be relying heavily on the financial statements, the auditor will probably set acceptable audit risk as low.

TRUE OR FALSE

A

TRUE

56
Q

Overall assessment of acceptable audit risk is highly subjective.

TRUE OR FALSE

A

TRUE

57
Q

An acceptable audit risk assessment of low indicates a risky client requiring more extensive evidence, assignment of more experienced personnel, and/or a more extensive review of audit files.

TRUE OR FALSE

A

TRUE

58
Q

Which of the following statements regarding inherent risk is correct?

A) Inherent risk is unaffected by the auditor’s experience with client’s organization.

B) Most auditors set a low inherent risk in the first year of an audit and increase it if experience shows that it was incorrect.

C) Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain more knowledge about the company.

D) Inherent risk is dependent upon the strengths in client’s internal control system.

A

C) Most auditors set a high inherent risk in the first year of an audit and reduce it in subsequent years as they gain more knowledge about the company.

59
Q

Auditors begin their assessments of inherent risk during audit planning. Which of the following would nothelp in assessing inherent risk during the planning phase?

A) obtaining client’s agreement on the engagement letter

B) obtaining knowledge about the client’s business and industry

C) touring the client’s plant and offices

D) identifying related parties

A

A) obtaining client’s agreement on the engagement letter

60
Q

Which of the following is nota primary consideration when assessing inherent risk?

A) nature of client’s business

B) existence of related parties

C) effectiveness of internal controls

D) susceptibility to misappropriation of assets

A

C) effectiveness of internal controls

61
Q

Which of the following is an accurate statement regarding inherent risk?

A) The profession has established guidelines for setting inherent risk.

B) Auditors are generally conservative in setting inherent risk.

C) Factors impacting inherent risk will affect all cycles, balances, and disclosures.

D) Inherent risk has no impact on the amount of evidence gathered.

A

B) Auditors are generally conservative in setting inherent risk.

62
Q

The risk of fraud should be assessed for the entire audit as well as by cycle, account, and objective.

TRUE OR FALSE

A

TRUE

63
Q

The auditing profession has established guidelines for setting inherent risk.

TRUE OR FALSE

A

FALSE

64
Q

Accounts that require considerable judgment have a higher inherent risk.

TRUE OR FALSE

A

TRUE

65
Q

Which of the following is true regarding audit risk for segments?

A) Control risk must be assessed at the same level for all accounts.

B) Factors affecting inherent risk do not differ from account to account.

C) Acceptable audit risk is ordinarily assessed by the auditor during the substantive test of balances phase and is held constant for each major cycle and account.

D) In some cases, a lower acceptable audit risk may be more appropriate for one account than for others.

A

D) In some cases, a lower acceptable audit risk may be more appropriate for one account than for others.

66
Q

Auditors respond to risk primarily by

I. changing the extent of testing.

II. changing the types of audit procedures.

A) I only

B) II only

C) I and II

D) neither I nor II

A

C) I and II

67
Q

When using the audit risk model,

A) auditors find it relatively easy to measure the components of the model.

B) many auditors use broad and subjective measurement terms.

C) auditors find it easy to measure the amount of evidence implied by a given planned detection risk.

D) auditors are only concerned with understating accounts.

A

B) many auditors use broad and subjective measurement terms.

68
Q

In applying the audit risk model, auditors are concerned about overstatements, notunderstatements.

TRUE OR FALSE

A

FALSE

69
Q

One major limitation in the application of the audit risk model is the difficulty of measuring the components of the model.

TRUE OR FALSE

A

TRUE

70
Q

Since the audit risk model is a planning model, it assists the auditor in evaluating results.

TRUE OR FALSE

A

FALSE

71
Q

When taken together, the concepts of risk and materiality in auditing

A) measure the uncertainty of amounts of a given magnitude.

B) measure uncertainty only.

C) measure magnitude only.

D) measure inherent risk.

A

A) measure the uncertainty of amounts of a given magnitude.

72
Q

Which of the following is a correct statement?

A) There is no relationship between materiality and risk in auditing.

B) Risk is a measure of magnitude or size.

C) The combination of performance materiality and the audit risk model factors determines planned audit evidence.

D) Performance materiality is part of the audit risk model.

A

C) The combination of performance materiality and the audit risk model factors determines planned audit evidence.

73
Q

Performance materiality impacts inherent risk and control risk.

TRUE OR FALSE

A

FALSE

Auditing Exam 3 (3 decks)

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