M2-Audit Risk Flashcards
The auditor uses the assessed level of control risk (together with the assessed level of inherent risk) to determine the assessed risk of material misstatement, which in turn affects the acceptable level of detection risk for financial statement assertions. (true or false)
true
As the acceptable level of detection risk decreases, the assurance provided from substantive test should increase. Consequently, the auditor should do one or more of the following:
1) Change the nature of substantive tests from a less effective to a more effective procedure,
2) Change the timing of the substantive tests, such as performing them at year-end rather than at an interim date, or
3) Change the extent of substantive tests, such as using a larger sample size
The auditor identifies internal controls relevant to specific financial statement assertions, and then performs tests of controls to evaluate their effectiveness in preventing material misstatements in those assertions. Control risk should be assessed in terms of financial statement assertions. (true or false)
true
A “factual misstatement” is a misstatement about which there is no doubt. (true or false)
true
Both the risk of material misstatement (including control risk and inherent risk) and detection risk may be assessed in quantitative terms such as percentages or in non quantitative terms that range, for example from a minimum to a maximum. (true or false)
true
The existence of audit risk is recognized by the statement in the standard report that the auditor obtained reasonable assurance about whether the financial statements are free of material misstatement. Audit risk is the risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated. (true or false)
true
The acceptable level of detection risk is inversely related to the assurance provided by substantive tests. For example, if the acceptable level of detection risk decreases, more assurance is required from substantive tests. (true or false)
true
Regardless of the assessed level of control risk, an auditor would perform some level of substantive tests to restrict detection risk for significant transaction classes. Even with the lowest possible assessed level of control risk, substantive testing cannot be entirely eliminated for significant transaction classes or balances. (true or false)
true
Inherent risk and control risk differ from detection risk in that they exist independently of the audit of financial statements, whereas detection risk is related to the auditor’s procedures and can be changed at the auditor’s sole discretion. (true or false)
true
A misstatement that involves an estimate is considered a judgmental misstatement. (true or false)
true
Projected misstatement is an auditor’s best estimate of misstatements in a population extrapolated from misstatements identified in an audit sample. (true or false)
true
Inherent risk is the susceptibility of a relevant assertion to a material misstatement, assuming there are no related controls. (true or false)
true
Control risk is the risk that a material misstatement that could occur in a relevant assertion will not be prevented or detected (and corrected) on a timely basis by the entity’s internal control. (true or false)
true
The auditor would most likely consider derivative transactions as an inherent risk factor. Derivative transactions entered into as hedges may result in an increased assessment of inherent risk. For example, derivatives entered into as hedges may involve complex calculations and/or may be based on accounting estimates that are subject to significant measurement uncertainty. (true or false)
true
When an auditor assesses control risk at the maximum level, the assessment should be documented and the auditor should make decisions to potentially perform more substantive procedures. (true or false)
true
