Module 12

Question 1

What is the definition of audit risk?

Answer 1

The risk that the auditor gives the wrong opinion on the financial statements when the financial statements are materially misstated

Will seek to reduce audit risk

Question 2

Giving the incorrect opinion may result in what?

Answer 2

Damage to the firms reputation and possible regulatory action

Question 3

What is misstatement?

Answer 3

Difference between an amount, classification, presentation or disclosure in the financial statements and the correct treatment in accordance with applicable financial reporting framework

Can arise from fraud or error

Question 4

What is the risk based approach designed to do?

Answer 4

Provide the highest quality evidence in a given time or for a given fee

Ensure that adequate evidence is collected

Question 5

What is the balance required for external audit?

Answer 5

Highlight irregularities in the financial statements whilst avoiding undue delay of the publication and without running up a significant fee

Question 6

What is the risk based approach?

Answer 6

Where the auditor tailors the nature, extent and timing of audit procedures performed according to the risk of there being a misstatement in that area

Question 7

What are the 5 fundamental principles of auditing?

Answer 7

Confidentiality 
Objectivity 
Professional competence
Integrity
Professional behaviour
COPIP

Question 8

What are the ethical threats?

Answer 8

Management 
Advocacy 
Self review
Self interest 
Intimidation
Familiarity 
MASSIF

Question 9

Besides the central concept of risk, what are the three fundamental concepts of the audit process?

Answer 9

Materiality
Evidence
Audit judgement

Question 10

What is materiality?

Answer 10

An expression of relative significance or importance of a matter in the whole context of f/s.
A matter is considered to be material if its omission or misstatement would reasonably influence the economic decisions of the users.

Question 11

How does materiality impact the auditor?

Answer 11

Determines the scope of work performed

Determines the nature of the final audit opinion

Question 12

An item can be material because of its what?

Answer 12

Size (quantitative)

Nature (qualitative)

Question 13

When should materiality be considered by the auditor?

Answer 13

At every stage

Question 14

The auditor can only express an opinion if they have collected enough what?

Answer 14

Evidence

Question 15

What are the three methods of gathering evidence?

Answer 15

Understanding the entity (planning)
Testing the controls (systems/controls)
Testing the numbers (substantive and completion)

Question 16

What is professional judgement?

Answer 16

Use judgement in assessing the evidence and forming conclusions

Question 17

What is professional scepticism?

Answer 17

A questioning mind that challenges management with a degree of doubt

that demands hard evidence, being alert to conditions that may indicate possible misstatement due to error or fraud and a critical assessment of audit evidence

Question 18

What are the three components of audit risk?

Answer 18

Inherent risk
Control risk
Detection risk

Question 19

What is inherent risk?

Answer 19

The susceptibility to material misstatement, irrespective of related internal controls

Question 20

What is control risk?

Answer 20

Risk that the entity’s controls will not prevent or detect and correct w material misstatement on a timely basis

Increases where control is poorly designed

Question 21

What is detection risk?

Answer 21

The risk that the auditors procedures will not detect material misstatements

Question 22

What is the audit risk formula?

Answer 22

Audit Risk = IR x CR x DR

Question 23

How is audit risk set?

Answer 23

At an acceptably low level, IR and CR are assessed and DR is manipulated to give the set AR

Question 24

What are the two categories of inherent risk?

Answer 24

Financial statement level

Assertion/ account balance level

Question 25

What is included in financial statement level risks?

Answer 25

Listed scrutiny
Seeking finance
Directors bonuses

Question 26

What is included in assertion level risks?

Answer 26

Cash

Complex areas

Question 27

What is the risk of material misstatement? ROMM

Answer 27

The combination of inherent risk and control risk.

The risk that a material misstatement may exist prior to auditor

Question 28

How might the auditor categorise IR and CR?

Answer 28

High medium and low

Question 29

What are the two categories of station risk?

Answer 29

Sampling

Non sampling

Question 30

What is included in sampling risk?

Answer 30

Sample sizes
Materiality

Risk that sample doesn’t give same conclusions as testing whole, can be reduced by increasing sample size

Question 31

What is included in non sampling risk?

Answer 31

New audit client
Poor review
Grade of audit team staff

Risk that incorrect judgement is made as procedures weren’t appropriate / wrongly interpreted

Question 32

What type of risk is the only element controlled by the auditor?

Answer 32

Detection risk

Question 33

Where ROMM is low, there is less chance of an error occurring. What does this mean for DR?

Answer 33

The auditor can accept a much higher level of detection risk as there is less chance errors exist in the first place

Question 34

Where ROMM is high what does this mean for DR?

Answer 34

Higher risk of misstatement, auditor has to do more work so they can only accept a lower level of DR as there is high IR and CR

Question 35

Audit risk is low where ROMM is low equation?

Answer 35

low IR x low Cr x high DR

Question 36

Audit risk is low where ROMM is high equation?

Answer 36

high IR x high CR x low DR

Question 37

Detection risk is calculated by?

Answer 37

Sampling risk x non sampling risk