Chapter 9 Slides

Question 1

auditors must accept some level of __ in performing audits

Answer 1

risk

Question 2

2 levels of risk of material misstatement

Answer 2

1. overall FS level
2. assertion (performance) level

Question 3

refers to the risks that relate pervasively to the FS as a whole and potentially affect a number of different transactiosn and accounts

Answer 3

risk of material misstatement at the overall FS level

Question 4

two components to risk of material misstatements at the assertion level (client’s risks)

Answer 4

1. inherent risk
2. control risk

Question 5

inherent risk

Answer 5

susceptibility of an ASSERTION to material misstatement based on the type of transactions

Question 6

3 items that cause inherent risk

Answer 6

1. complex transactions
2. estimates
3. calculations

Question 7

control risk

Answer 7

the risk that internal controls will not prevent or detect material misstatement

Question 8

risk assessment procedures include (5)

Answer 8

1. inquiries of management and others within entity
2. analytical procedures
3. observation and inspection
4. discussion among engagement team members
5. other risk assessment procedures

Question 9

risk assessment procedures 3 roles

Answer 9

1. help understand entity and environment, ICs
2. help identify and assess ROMM
3. develop audit strategy and plan in response to assessed risks

Question 10

risk assessment procedures include assessing the risk of material misstatements to specifically to

Answer 10

fraud

Question 11

auditor must consider fraud risk at both

Answer 11

FS level and assertion level

Question 12

auditing standards require the auditor to presume that risks of fraud exist in __ __

Answer 12

revenue recognition

Question 13

auditor must determine whether any of the risks identified are a

Answer 13

significant risk

Question 14

significant risk

Answer 14

any risk the auditor deems needs special attention

Question 15

transactions/balances that are typically significant risks

Answer 15

1. nonroutine transactions (such as related-party transactions)
2. balances/transactions requiring estimates for which significant measurement uncertainty exists

Question 16

all __ risks are normally considered significant risks

Answer 16

fraud

Question 17

to decide appropriate AAR, auditors must first decide the

Answer 17

engagement risk

Question 18

engagement risk

Answer 18

risk that the auditor/firm will suffer harm AFTER the audit is finished, even though the report was correct

Question 19

if engagement risk is higher, the firm should…

Answer 19

use more experienced auditors

Question 20

engagement risk is closely related to __ __ __ because the risk that the auditor will be sued is often related to business failure after the audit is finished

Answer 20

client business risk

Question 21

audit risk model

Answer 21

PDR = AAR / (IR x CR)

Question 22

planned detection risk

Answer 22

the risk that the audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality

Question 23

factors affecting AAR

Answer 23

1. degree to which external users rely on statements
2. likelihood that a client will have financial difficulties after the audit
3. auditor’s evaluation of management’s integrity

Question 24

degree to which external users rely on statements depends on these factors

Answer 24

1. client size
2. distribution of ownership
3. nature and amount of liabilities

Question 25

likelihood that a client will have financial difficulties after the audit based on

Answer 25

1. liquidity position 2. profits/losses in previous years 3. method of financing growth 4. nature of client's operations 5. competence of management

Question 26

assessing inherent risk is an attempt by the auditor to predict...

Answer 26

where misstatements are most and least likely in the FS segments

Question 27

inherent risk affects the

Answer 27

amount of audit evidence the auditor needs to accumulate

Question 28

the auditor must assess the __ that make up the risk and __ __ __ for audit evidence to take them into consideration

Answer 28

factors modify the procedures

Question 29

when is inherent risk considered?

Answer 29

during the planning phase; updated throughout the audit process

Question 30

factors to consider when assessing inherent risk (9)

Answer 30

1. nature of client's business 2. results of previous audits 3. initial vs. repeat engagement 4. related parties 5. complex or non-routine transactions 6. judgment required to correctly record account balances and transactions 7. makeup of population 8. factors related to fraudulent financial reporting 9. factors related to misappropriation of assets

Question 31

in addition to modifying audit evidence, the auditor can also make the following changes to respond to risk (2)

Answer 31

1. engagement may require more experienced staff 2. engagement will be reviewed more carefully than usual

Question 32

audit risk for segments

Answer 32

the ROMM, CR, and IR are assessed for each audit objective in each segment of the audit

Question 33

major limitation in application of audit risk model

Answer 33

difficulty of measuring components of the model (highly subjective) (typically use broad categories such as low, medium, high)

Question 34

auditors use various types of decision aids to help link judgments affecting audit evidence with appropriate evidence to accumulate, such as the...

Answer 34

test of details of balances evidence-planning worksheet

Question 35

the audit risk model is primarily a __ model and is of limited us in __ results

Answer 35

planning evaluating

Question 36

if audit evidence suggests the risk is higher than originally thought, the auditor must (2)

Answer 36

1. revise the original assessment 2. consider the effects of the revision on evidence requirements

Question 37

risk and materiality are inseparable--what's the difference?

Answer 37

risk is a measure of UNCERTAINTY, materiality is a measure of MAGNITUDE