Chapter 4 - Audit Exam 2

The existence of audit risk is recognized by the statement in the auditors report that the auditor

Obtains reasonable assurance that financial statements are free of material misstatement. 

Which two “client” components make up the risk of material misstatement?

Inherent and Control Risk

The risk that audit procedures fail to detect a material misstatement is known as:

Detection Risk

A client’s new ERP system was implemented during the year. How does this affect audit risk?

It likely increases the risk of material misstatement

Which of the following is least likely considered when assessing inherent risk for sales transactions?

The nature of the credit authorization process

Which factor most likely heightens an auditors concern about intentional manipulation?

Management places heavy emphasis on meeting earnings projections.

Misappropriation of Assets

Theft of cash or inventory, embezzlement or false expense claims.

Error

Unintentional misstatement of financial information

Factual Misstatement

Misstatement due to incorrect pricing on a sales invoice.

Opportunity (Fraud triangle)

Conditions that allow someone to commit fraud without detection

Duty to disclose

circumstances where auditors must communicate beyond management

Which inquiry regarding fraud is required by auditing standards?

Whether management has knowledge of any fraud in or on the entity.

SAS 99

Is the standard guiding auditors responsibilities related to fraud, it requires direct inquiry about known or suspected frauds

Which of the following is an example of fraudulent financial reporting?

Management falsifies inventory count, overstating ending inventory

If the risk of material misstatement is higher than anticipated, how should the auditor respond?

Increase supervision and perform more extensive testing.

If acceptable audit risk is low and RMM is high, detection risk must be

Low

Management Fraud

Deliberate misstatement by management to deceive users

Risk Assessment Documentation

Record of Auditors reasoning and understanding of client risk factors

Which of the following procedures helps the auditor identify potential fraud risk factors?

Conducting brainstorming sessions with the audit team

What should the auditor do if a material misstatement appears due to fraud?

Discuss with management and those charged with governance; consider implications on other aspects of the audit.

What is the auditors primary responsibility related to fraud?

To plan and perform the audit to obtain reasonable assurance that the financial statements are free from material misstatement due to fraud or error.

Reasonable Assurance

A high but not absolute level of confidence that the statements are fairly presented

Audit Risk

the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated

Risk of Material Misstatement (RMM)

the combined effect of inherent and control risk.

Detection Risk (DR)

the probability that audit evidence will not detect a misstatement that exists.

Inherent Risk (IR)

the susceptibility of an account to misstatement before considering controls.

Fraud Triangle

three conditions for fraud: incentive/pressure, opportunity, and rationalization.

Misappropriation of Assets

theft of cash or inventory, embezzlement, or false expense claims.

Factual Misstatement

a clear, verifiable error identified by the auditor.

Opportunity (Fraud Triangle)

conditions that allow someone to commit fraud without detection.

Duty to Disclose

circumstances where auditors must communicate beyond management (e.g., to regulators or successors).

SAS 99 (AU-C 240)

the standard guiding auditors’ responsibilities related to fraud.

Fraudulent Financial Reporting

intentional misstatement to deceive financial statement users.

Audit Risk Model (AR = IR × CR × DR)

the formula linking risk components.

Management Fraud

deliberate misstatement by management to deceive users.

Risk Assessment Documentation

record of auditor’s reasoning and understanding of client risk factors.

Reasonable Assurance

a high but not absolute level of confidence that the statements are fairly presented.