SU 3 Planning And risk Assessment

Question 1

What is control risks?

Answer 1

The risk that internal control will not prevent, detect, or correct a material misstatement in a timely manner.

Question 2

What is detection risk?

Answer 2

The risk that the procedures performed by the auditors to reduce audit risk to an acceptably low level will not detect a material misstatement.

Question 3

Inverse relationship

Answer 3

When one value increases, the other value decreases. Ex: when risk of material misstatement is high, then acceptable detection risk is low.

Question 4

What are the 3 levels of materiality?

Answer 4

1. Financial statement level
2. Particular acct balances, disclosures or classes of transactions
3. Performance materiality

Question 5

What is Business risk?

Answer 5

Results from
1. significant factors that could adversely affect an entity’s ability to achieve its objectives
2. Setting inappropriate objectives and strategies

Question 6

Primary Purpose of Customer price index (CPI)

Answer 6

Compare price changes overtime. It’s Computed by the DOL.

Question 7

What is the law of Supply and demand?

Answer 7

In general the law of supply and demand dictates that when price increases, demand decreases.

Question 8

Inelastic demand

Answer 8

When the percentage change in quantity demanded is less than the percentage change in price demand is inelastic.
Example: 5% price increase results in a 3% decrease in quantity demanded
The percentage change in quantity demanded is less than the percentage change in price.

Question 9

Elastic demand

Answer 9

When the elasticity of a product is greater than 1, demand is elastic. Elastic demand means that as the price increases, the decrease in demand is larger than the price increase.

Question 10

What does detection risk relate to?

Answer 10

The nature, timing and extent of audit procedures. Ex: performing an audit at an interim date vs year end increases detection risk. Because a misstatement may not be detected.

Question 11

Detection risk fact

Answer 11

As RMMs increase, the acceptable level of detection risk decreases. The audit then needs more substantive procedures.

Question 12

Fact

Answer 12

The cost of correcting misstatements is not considered when determining if uncorrected misstatements are material.

Question 13

Inherent risk

Answer 13

The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material.

Question 14

Examples of inherent risk

Answer 14

1. Complex calculations
2. Amounts with significant estimation uncertainty
3. Business risk ex: technology advances that make products obsolete
4. Management fraud or bias
5. Emerging issues

Question 15

What constitutes materiality?

Answer 15

Misstatements and omissions are material if it is likely that they would influence judgement made by a reasonable user of the statements.

Question 16

Factual misstatement

Answer 16

No doubt exists

Question 17

Planning an Audit

Answer 17

Planning an audit includes developing an overall strategy and an audit plan. This includes obtaining an understanding of an entity and its environment including its internal control to identify and assess the RMM.

Question 18

Demand curve vs Supply curve

Answer 18

Demand: the impact of price on products purchased.
Supply: the impact of price on products offered.

Question 19

Fact

Answer 19

Analytical procedures applied as risk assessment procedures are used to plan the audit.

Question 20

Analytical procedures used to form an overall conclusion include:

Answer 20

Reading the FS and considering:
1. The adequacy of evidence gathered in response to unusual or unexpected balances.
2. Unusual or unexpected balances or relationships not previously detected.

Question 21

What is demand?

Answer 21

The amount of a good or service that consumers are willing and able to buy at various prices during the period.

Question 22

What is supply?

Answer 22

The amount of a goods that producers are willing and able to offer at various prices during a specified period.

Question 23

The audit plan includes

Answer 23

1) The nature and extent of risk assessment procedures
2) the nature timing and extent of further audit procedures at the assertion level
3) other procedures required by GAAS

Question 24

Inconsistent fluctuations or relationships or significant differences result in what?

Answer 24

1. Additional audit procedures
2. Inquiries of management
3. Corroboration with other evidence

Question 25

Internal control questionnaires

Answer 25

Document the auditors understanding of internal control.