SU 03: Risk Assessment

Question 1

In designing written audit plans an auditor should establish audit objectives that relate primarily to
A timing of procedure
B cost benefits of gathering evidence
C financial statement assertions

Answer 1

C, financial statement assertions - most audit work consists of obtaining and evaluating evidence about relevant assertion which are management representations embodied in f/s components

Question 2

The audit in charge most likely would have supervisory responsibility to explain to staff
A that immaterial fraud is no reported to clients audit committee
B possible accounting issues
C benefits of adherence to time budgets

Answer 2

B, AU 311 indicates that assistants should be informed of their responsibilities and the objectives of the procedures that they are to perform. They should be informed about nature, timing, and extent of procedures, including accounting issues

Question 3

The existence of audit risk is recognized by the statement in the auditor standard report that the
A auditor is responsible for expressing an opinion on f/s, which are the responsibility of management
B f/s are fairly presented in all material respects in conformity w GAAP
C auditor obtains reasonable assurance about whether f/s are free from material misstatement

Answer 3

Audit risk is the risk that the auditor expresses an inappropriate audit opinion when f/s are materiality misstated AU 312. The high, but not absolute, level of assurance that is intended to be obtained by the auditor is expressed in auditors report as obtaining reasonable assurance about f/s are free of material misstatement AU 230

Question 4

As the acceptable level of detection risk decreases an auditor may
A reduce substantive testing by relying on assessments of inherent risk and control risk
B postpone the planned timing of substantive tests from interim to year-end

Answer 4

B, a decrease in acceptable detection risk or amount considered material will result in the auditor modifying audit plan to obtain greater assurance from substantive testing 1 selecting a more effective audit procedure 2 applying procedures near year end 3 increasing the extent of particular tests

Question 5

The acceptable level of detection risk is inversely related to the
A assurance provided by substantive procedures
B risk of misapplying audit procedures

Answer 5

An auditor considers internal control to assess control risk. They also assess inherent risk. The greater (lower) the assessed levels of control risk and inherent risk, the lower (greater) the acceptable level of detection risk. Hence the relationship between performing substantive procedures and detection risk is inverse

Question 6

Which of the following would an auditor most likely use in determining materiality for financial statements as a whole when establishing the overall audit strategy
A the results of internal control questionnaires
B the entity’s period to date financial results and position

Answer 6

The auditor materiality level might be based on the entity period to date f/s results and position. But recognition should be given to the effect of major changes in the entity circumstances and relevant changes in the economy as a whole

Question 7

A client decides not to make proposed adjustments that collectively are not material and wants auditor to issue report based on unadjusted numbers. Which of the following is true regarding financial presentation
A the f/s are free from material misstatement and no disclosure is required in the financial notes
B the f/s do not conform w GAAP
C the f/s are free from material misstatements, but disclosure of proposed adjustments are required in notes to financial statements

Answer 7

A If proposed adjustments are immaterial by definition the f/s are free from material misstatements, and an unqualified opinion may be expressed. However the schedule of proposed adjustments must be included in the management representation letter and management must assert that these proposed adjustments are individually and collectively immaterial
C is incorrect because no notes would be required in disclosure

Question 8

New audit engagement that CPA does not posses expertise in industry the CPA should
A reduce audit risk by lowering initial level of materiality
B engage expert familiar w industry
C perform risk assessment procedures

Answer 8

C The auditor should obtain an understanding of the entity and its environment, including internal control. For the purposes of audit the following risk assessment procedures are 1 inquiries of management 2 analytical procedures 3 observation and inspection
An expert does not relieve responsibility to obtain understanding
Can make materiality judgement until auditor has understanding

Question 9

To obtain understanding of continuing client most likely
A perform tests of details
B read internal audit reports
C read industry journals

Answer 9

B the auditor performs risk assessment to understand environment, including internal control 1 internal audit reports 2 interim statements 3 quarterly reports 4 board minutes
RMM is updated after understanding

Question 10

Premise underlying analytical procedures is

Answer 10

Plausible relationship among data may reasonably be expected to exist and continue in the absence of known conditions to the contrary
Variability in these relationships can be explained by, for example, unusual events or transactions, business accounting changes misstatements or random fluctuations

Question 11

Which is more predictable income statement or balance sheet accounts and why

Answer 11

Income statement because income statement accounts are over a period of time and balance sheet are at a moment in time

Question 12

If information implies the existence of possible illegal acts that could have a material but indirect effect on the f/s comes to the auditor attention they should do what next
A apply audit procedures specifically directed to ascertain whether illegal act has occurred
B seek advice of legal professional regarding contingent liabilities
C consider withdrawing fro, the engagement

Answer 12

A, the auditor should apply procedures specifically directed at ascertaining whether illegal act has occurred. When an act is discovered the auditor should obtain an understanding of the nature and circumstances of the act and other information to evaluate the effect on f/s

Question 13

Engagement Letter

Answer 13

1. ) Should establish an understanding regarding services to be performed
2. ) Objectives and limitations of audit and responsibilities of management and auditor
3. ) Address other issues: a) overall audit strategy b) additional services c) fees d) predecessor involvement e) access to audit documentation
4. ) Letter should be sent by CPA, if agreement, should sent back signed by client
5. ) Management is responsible for adjusting the statements to correct material misstatements. Furthermore, the management representation letter must assert any effects of uncorrected misstatements that are immaterial individually or in the aggregate

Question 14

Who is responsible for initiation of communication with predecessor auditor

Answer 14

AU 315 indicates that the auditor with permission of the client is responsible to initiate communication with predecessor prior to final acceptance of the engagement.

Question 15

Audit Strategy - The auditor should consider

Answer 15

1. ) Characteristics of the engagement and reporting objectives
2. ) Appropriate levels of materiality
3. ) high areas of risk
4. ) Material client locations and account balances
5. ) Whether to seek evidence of the operating effectiveness of internal control
6. ) Relevant entity-specific, industry developments
7. ) Consideration of audit resources

Question 16

Audit Plans

Answer 16

a. ) an audit plan must be developed and documented for all audit engagements
b. ) The plan also includes decription of further audit procedures at relevant assertion level (class trans, acct bal, disclosures)
c. )

Question 17

Balance, Transaction Class, or Disclosure level (BTCDL)

Answer 17

a.) Audit risk and materiality have an inverse relationship
b.) Accordingly, if other factors are constant, decreasing audit risk judged to be appropriate or amount material misstatement for a balance requires auditor to do at least on of the following
1 Perform most effective procedures
2 Perform procedures at year end
3 increase extent of certain procedures
c.) At BTCDL auditor’s procedures should provide reasonable assurance of detecting misstatements material to f/s as a whole when aggregated with other misstatements

Question 18

Audit Risk Model

Answer 18

AR = RMM x DR or expanded to AR = RMM x (TD x AP)
AP - Analytical Procedures
TD - Test of details

Question 19

If the acceptable level of detection risk decreases the auditor may?

Answer 19

Postpone the planned timing of substantive tests form interim dates to year-end. A decrease in the acceptable level of detection risk or in the amount considered material will result in auditor modifying audit plan to obtain greater assurance form substantive testing.

Question 20

Risk of Material Misstatement RMM =

Answer 20

Inherent Risk and Control Risk these are independent and cannot be changed by the auditor.

Question 21

Acceptable level of Detection risk is inversely related to

Answer 21

Assurance provided by substantive procedures

Question 22

Prior to beginning field work on new audit engagement the CPA should

Answer 22

Gain understanding of entity and internal control environment, the auditor performs risk assessment procedure such as: 1) inquiries of management and others within entity 2) analytical procedures 3) observation and inspection

Question 23

Analytical Procedures used in overall review stage generally include

Answer 23

Considering unusual or unexpected account balances that were not previously identified. Analytical procedures are useful in assessing the conclusions reached. Many procedures can be used. These ordinarily should include 1.) the adequacy of evidence to identify unusual acct bal 2) unusual or unexpected bal or relationships not previously noted

Question 24

Specific Information related to existence of illegal acts with material indirect effect comes to the auditor’s attention what should auditor do next

Answer 24

Apply audit procedures specifically directed at ascertaining whether the illegal act actually occurred.

Question 25

Terms of Engagement Letter

Answer 25

Objectives and Scope
Responsibilities (auditor- expression of opinion and management (internal control & F/s)
Inherent Limitations
Financial reporting framework
Reports

Question 26

Management Representation Letter

Answer 26

Effects of misstatement are immaterial in the summary

Question 27

Materiality Definition

Answer 27

Whether misstatements could reasonably influence the economic decisions of users both quantitative and qualitative considerations

Question 28

Materiality defined at which 3 levels

Answer 28

F/S as a whole
Account balances, classes of transactions, or dislosures
Performance materiality

Question 29

Performance Materiality

Answer 29

The level of materiality that is based below the overall materiality.

Question 30

Risk Assessment Procedures

Answer 30

Inquiries
Analytical Procedures
Observation and Inspection - (tracing documents/performing a walk-through)

Question 31

Documentation of audit risk and materiality

Answer 31

1. ) The amount below which misstatements are clearly trivial
2. ) All misstatements accumulated
3. ) Whether accumulated misstatements have been corrected
4. ) basis for conclusion whether misstatements are trivial.

Question 32

Risk assessment procedures to obtain an understanding include

Answer 32

1. ) inquiries of management
2. ) Analytical procedures
3. ) Observation and inspection

Question 33

Gain understanding of relevant internal controls to

Answer 33

1. ) Determine types of possible misstatements
2. ) Identify what affects the RMMs
3. ) Design further procedures

Question 34

5 sources of information to develop analytical procedures

Answer 34

1. ) Financial Information from Comparable Prior Periods
2. ) Anticipated Results
3. ) Relationships among elements of Financial Information
4. ) Comparable information from the client’s industry
5. ) Relationships between financial and relevant non-financial information