Responding to Risk Assessment

Question 1

Accounting estimate

Answer 1

an approximation of a monetary amount in the absence of a precise means of measurement.

Question 2

Analytical procedures

Answer 2

evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data. Analytical procedures also encompass such investigation, as is necessary, of identified fluctuations or relationships that are inconsistent with other relevant information or that differ from expected values by a significant amount.

Question 3

Appropriateness (of audit evidence)

Answer 3

measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based

Question 4

Arm’s length transaction

Answer 4

transaction conducted on such terms and conditions between a willing buyer and a willing seller who are unrelated and are acting independently of each other and pursuing their own best interests

Question 5

Assertions

Answer 5

Representations by management, explicit or otherwise, that are embodied in the financial statements, as used by the auditor to consider the different types of potential misstatements that may occurr

Question 6

Audit evidence

Answer 6

information used by the auditor in arriving at the conclusions on which the auditor’s opinion is based. Audit evidence includes both information contained in the accounting records underlying the financial statements and other information:

1. sufficiency of audit evidence is the measure of the quantity of audit evidence. The quantity of the audit evidence needed is affected by the auditor’s assessment of the risks of material misstatement and also by the quality of such audit evidence
2. Appropriateness of audit evidence is the measure of the quality of audit evidence; that is, its relevance and its reliability in providing support for the conclusions on which the auditor’s opinion is based.

Question 7

Control risk

Answer 7

The risk that a misstatement that could occur in an assertion that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control

Question 8

Detection risk

Answer 8

the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

Question 9

Exception (to external confirmation request)

Answer 9

a response that indicates a difference between information requested to be confirmed, or contained in the entity’s records, and information provided by the confirming party

Question 10

External confirmation

Answer 10

audit evidence obtained as a direct written response to the auditor from a third party (the confirming party), either in paper form or by electronic or other medium

1. the auditor’s direct access to information held by the confiming party may meet the definition of an external confirmation
2. the auditor’s access to information held by the confirming party may also be facilitated by a third party provider

Question 11

Fraud

Answer 11

an intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in financial statements that are the subject of an audit. (misstatements arising from fraudulent financial reporting and misstatement arising from misappropriation of assets

Question 12

Fraud risk factors

Answer 12

events or conditions that indicate an incentive or pressure to perpetrate fraud, provide an opportunity to commit fraud, or indicate attitudes or rationalizations to justify a fraudulent action.

Question 13

Fraudulent financial reporting (management fraud, cooking the books)

Answer 13

Material misstatements of financial statements by management with the intent to mislead financial statement users

Question 14

Further audit procedures

Answer 14

the additional procedures that are performed based on the results of the auditors’ risk assessment procedures. Such procedures include

(1) tests of controls (if needed)
(2) detailed tests of transactions, balances and disclosures
(3) substantive analytical procedures

Question 15

Internal auditing

Answer 15

an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objective by bring a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes

Question 16

Negative confirmation request

Answer 16

a request that the confirming party respond directly to the auditor only if the confirming party disagrees with the information provided in the request

Question 17

Nonresponse

Answer 17

a failure of the confirming party to respond, or fully respond, to a positive confirmation request, or a confirmation request returned undelivered

Question 18

Omitted procedure

Answer 18

an auditing procedure that the auditor considered necessary in the circumstances existing at the confirmation request returned undelivered

Question 19

Positive confirmation request

Answer 19

a request that the confirming party respond directly to the auditor providing the requested information or indicating whether the confirming party agrees or disagrees wit the information in the request

Question 20

related-party transaction

Answer 20

a transaction in which one party has the ability to influence significantly the management or operating policies of the other party, to the extent that one of the transacting parties might be prevented from pursuing fully its own separate interests

Question 21

Risk assessment procedures

Answer 21

the audit procedures performed to obtain an understanding of the entity and its environment, including the entity’s internal control, to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels

Question 22

relevant assertion

Answer 22

a financial statement assertion that has a reasonable possibility of containing a misstatement or misstatement that would cause the financial statements to be materially misstated. The determination of whether an assertion is a relevant assertion is made without regard to the effect of controls.

Question 23

Risk of material misstatement

Answer 23

the risk that the financial statements are materially misstated prior to the audit. This consists of two components, inherent risk and control risk

Question 24

scanning

Answer 24

a type of analytical procedure involving the auditor’s use of professional judgement to review accounting consists of two components, inherent risk and control risk

Question 25

Specialist

Answer 25

an individual or organization possessing expertise in a field other than accounting or auditing, whose work in that field is used by the auditor to assist the auditor in obtaining sufficient appropriate audit evidence

Question 26

Subsequent events

Answer 26

events occuring between the date of the financial statements and the date of the auditor’s report that require adjustment of, or disclosure in, the financial statements.

Question 27

subsequently discovered facts

Answer 27

facts that become known to the auditor after the date of the auditor’s report that, had they been known to the auditor at that date, may have caused the auditor to amend the auditor’s report

Question 28

substantive procedure

Answer 28

an audit procedure designed to detect material misstatements at the assertion level. Substantive procedures comprise tests of details (classes of transactions, account balances, and disclosures) and substantive analytical procedures

Question 29

sufficiency (of audit evidence)

Answer 29

the measure of the quantity of audit evidence. the quantity of the audit evidence needed is affected by the auditor’s assessment of the risks of material misstatements and also by the quality of such audit evidence

Question 30

written representation

Answer 30

a written statement by management provided to the auditor to confirm certain matters or to support other audit evidence. written reorientations, for purposes of his section, do not include financial statements, the assertions therein, or supporting books and records.