Definitions

Question 1

Inherent risk

Answer 1

Is the susceptibility of an assertion to material misstatement assuming there are no related controls.

Question 2

Fraud risk

Answer 2

Fraud risk is the risk of material misstatement of the financial statements due to fraud. The auditor is required to evaluate fraud risk, and must consider whether and to what extent fraud risk factors:
incentives/pressures
opportunity
and rationalization/attitude) exist.

Question 3

Audit risk

Answer 3

Audit risk is the risk that the auditor may unknowingly fail to modify appropriately the opinion on financial statements that are materially misstated. In this case, the auditors did not know that sales were materially overstated and therefore failed to appropriately modify the opinion.

Question 4

Risk of incorrect rejection

Answer 4

The risk of incorrect rejection is the risk that a sample mistakenly indicates a material misstatement in an account balance when in fact such balance is fairly stated.

Question 5

Detection risk

Answer 5

Detection risk is the risk that the auditor will not detect a material misstatement that exists in an assertion. Detection risk generally relates to the auditor’s procedures.

Question 6

Risk of assessing control risk too low

Answer 6

The risk of assessing control risk too low is the risk that the sample indicates a lower error rate than actually exists in the population at large.
Attribute sampling/controls

Question 7

Risk of assessing control risk too high

Answer 7

The risk of assessing control risk too high is the risk that the sample indicates a greater error rate than actually exists in the population at large. In this case, based on the selected sample, Wilson believes that this control is not operating effectively. In fact, appropriate credit approvals are being obtained.

Question 8

Control Risk

Answer 8

Control risk is the risk that a material misstatement that could occur in an assertion will not be prevented or detected on a timely basis by the entity’s internal control. In this case, Roy Rogers’ purchasing function lacks the controls that would prevent or detect errors.

Question 9

Control risk is directly proportional to:

Answer 9

Control Risk is directly proportional to Sample Size:
⇒ Higher the Control Risk, Higher the Sample Size
⇒ Lower the Control Risk, Lower the Sample Size

Question 10

Frequency of Misstatement is directly proportional to Sample Size:

Answer 10

Frequency of Misstatement is directly proportional to Sample Size:
⇒ Higher the Frequency of Misstatement, Higher the Sample Size
⇒ Lower the Frequency of Misstatement, Lower the Sample Size

Question 11

Detection Risk is inversely proportional to Sample Size:

Answer 11

Detection Risk is inversely proportional to Sample Size:
⇒ Higher the Detection, Lower the Sample Size
⇒ Lower the Detection Risk, Higher the Sample Size

Question 12

Tolerable Misstatement is inversely proportional to Sample Size:

Answer 12

Tolerable Misstatement is inversely proportional to Sample Size:
⇒ Higher the Tolerable Misstatement, Lower the Sample Size
⇒ Lower the Tolerable Misstatement, Higher the Sample Size

Question 13

Tests of controls are procedures performed to evaluate the effectiveness of either the design or the operation of a control.

Answer 13

Substantive tests are of tests of the details of transactions and balances, and analytical review procedures.

Question 14

Implicitly - Not Mentioned in the report (but implied)
Explicitly - Mentioned in the report (verbatium)