Lec 8

Question 1

what does account and class of transaction refer to

Answer 1

balance sheet account and income statement accounts

Question 2

what is the audit risk model (ARM) applicable to?

Answer 2

it is applicable to every account and class of transaction for every assertion made

Question 3

what is the equation for audit risk

Answer 3

inherent risk x control risk x detection risk

Question 4

when is desired audit risk determined and what is it based on

Answer 4

determined during the planning stages of the audit and is based on the amount of F/S users

Question 5

what is the equation for risk of material misstatement (RMM)

Answer 5

inherent risk x control risk

Question 6

1 - level of assurance = ?

Answer 6

audit risk

Question 7

define inherent risk

Answer 7

risk that an account or class of transactions will be misstated BEFORE considering internal control measures - it is assuming there is not internal control

Question 8

what other risk is inherent risk tied to and why

Answer 8

business risk because the issues popping up in inherent risk are typical business risks the company faces

Question 9

define control risk

Answer 9

risk of accounts or class of transactions that can be misstated due to not being prevented or detected by any internal control systems

Question 10

what is the difference between inherent and control risk

Answer 10

inherent risk is risk of misstatement before internal controls while control risk is risk of misstatement after inter control

Question 11

what does it mean for assertions when internal controls are tight

Answer 11

when internal controls are tight it means that assertions made are more reliable

Question 12

define detection risk

Answer 12

risk that an auditor will not detect the misstatement

Question 13

how is detection risk tied to audit work

Answer 13

the more audit work that is done, the more sufficient and appropriate evidence is gathered, the smaller the detection risk

Question 14

how does detection risk relate to the audit risk equation

Answer 14

it is the only thing that can be controlled by the auditor based on how much work they are willing to do and level of risk they willing to accept

Question 15

what procedures does the detection risk depend on

Answer 15

substantive procedures

Question 16

what is preventative control

Answer 16

control that prevents misstatements from happening

Question 17

what is detective control

Answer 17

control that find misstatements after they’ve happened

Question 18

what 2 risks make detection risk

Answer 18

sampling and non-sampling risk

Question 19

sampling risk

Answer 19

risk that chosen sample is not representative of the population and it is one of the reasons why a misstatement might not be detected

Question 20

non-sampling risk

Answer 20

essentially the risk that auditor is incompetent
- use of inappropriate audit procedures
- failure to detect even with use of proper procedures
- misinterpreting of audit results

Question 21

what is an example of a sample risk

Answer 21

confirmation of A/R existence - we cannot send confirmation for all

Question 22

can auditor affect inherent or control risk?

Answer 22

NO, the auditor can only assess them

Question 23

examples of business risk

Answer 23

• significant changes in business
• significant changes in industry
• disruptive new products and services
• operation in unstable areas

Question 24

what are the two types of business risk analysis and what do they determine

Answer 24

strategic analysis and business process analysis. determine weaknesses in client’s risk management and how they could lead to misstatements

Question 25

what does business performance analysis consider

Answer 25

financial and non-financial data and how they are related

Question 26

what are the 4 ways that risk can be managed

Answer 26

mitigating the risk (contingency plan), avoiding the risk, transferring the risk, accepting the risk

Question 27

what is risk avoidance

Answer 27

when risk consequences are too high you could stop them by canceling the business endeavor

Question 28

why would a company chose to accept the risk and give an example

Answer 28

when the risk is so insigignificant or unlinkely to occurr e.g. office being hit by a meteor

Question 29

what are the two considerations in the risk assessment square

Answer 29

likelihood and magnitude

Question 30

what part of the audit stage are tests done

Answer 30

in the implementation stage

Question 31

what is the “standard” for internal control knowledge and testing during audit

Answer 31

testing is not required in every audit but knowledge of auditee control is MANDATORY

Question 32

what is internal control walkthrough

Answer 32

when you pick a few transactions and follow them through the internal control system

Question 33

what does the substantive approach include

Answer 33

only analytical procedures and tests of details of balances - does not include control test

Question 34

control test requirements in canada and usa

Answer 34

up to auditor in canada and required in USA

Question 35

what is the combined approach in testing

Answer 35

includes control tests and substantive tests

Question 36

what is the 6th implicit assertion

Answer 36

assertion that company is compliant with reporting standards

Question 37

what is an overall description of the control environement

Answer 37

• actions and policies that reflect the attitude of top management
• effectively controlled corp lies in attitude of management
• these factors are assessed as part of knowledge of business and build a client risk profile

Question 38

what do the control environment components of HIPDOC mean

Answer 38

• HR policies
• Integrity
• management Philosophy
• board of Directors
• Organization structure
• Commitment to competence

Question 39

components of control activities (SPAID)

Answer 39

• Segregation of duties
• adequate Physical controls
• proper Authorization
• Independent verification
• adequate Documents

Question 40

Components of information and communication systems (IFSAI)

Answer 40

• Initiation
• Financial reporting process
• Significant classes of transactions
• Accounting records
• information Technology