Auditing Ch 4

___________ incorporate information from a variety of sources such as relationships among current financial balances and prior balances, forecasts, and nonfinancial data.

Analytical procedures

_____________ can be used when planning the audit, when performing substantive procedures during an audit, and as a method of overall review at the end of an audit.

Analytical procedures

For Timing, _________ detection risk allowed means that testing can be performed at interim and _________ detection risk allowed means testing is performed at the end of the year.

Higher; lower

The ___________ needs to be set low or very low

audit risk

An audit committee is composed of members of a company's _____________ who are not involved in the day-to-day operations of the company.

board of directors

Existence is riskier than completeness for ______.

cash

Question an auditor asks when assessing ___________ risk is, "What is the audit client doing when misstatements occur?" and "Are proper systems in place to prevent or detect misstatements?"

control

auditors would not seem to exhibit ___________ if the level of audit risk was too high

due professional case

A type of fraud involving wrongful misappropriation of funds or property, often accompanied by false accounting entries and other deceptions and cover-ups is called __________ or defalcation

embezzlement

Employee fraud can be classified as either ______ or ______

embezzlement; larceny

Analytical procedures used when planning an audit should concentrate on signs of accounts and relationships that may represent specific potential problems and risks in the __________

financial statements.

The audit team's first concern is the effect of the noncompliance on the _______________

financial statements.

Extent allows __________ for lower detection risk allowed and _________ for higher detection risk allowed

more tests; fewer tests

The __________ of an audit procedure refers to the type of procedure (Eg: observation, recalculation, inquiry), this is where the auditor is considering WHAT to do.

nature

The type and purpose is referred to as the __________ of an audit procedures.

nature

Based on the allowable or planned level of detection risk, auditors modify the __________of further audit procedures.

nature, timing and extent

Typical ways that companies cause financial statements to be misstated through fraud of aggressive financial reporting include ______, understating expenses and overstating revenues, and omitting important information from disclosures

overstating assets or understating liabilities

An audit team making a choice to rely exclusively on evidence produced by substantive procedures is ______.

permissible, but rarely done

IF the relevant assertion is risky, or the related controls are poor, auditors would want to ______________ by modifying the nature, time, and extent of further procedures to increase their effectiveness.

reduce detection risk

A higher assessed risk of material misstatement for a relevant assertion being audited ______ detection risk.

reduces

A management assertion that has a reasonable possibility of containing a material misstatement without regard to the effect of internal controls is considered a ______ assertion.

relevant

An account or disclosure that has a reasonable possibility of containing a material misstatement regardless of the effect of internal controls is considered a ______ account or disclosure.

significant

If the audit risk is at .05 that means that on average that five percent of audit opinions would be __________

wrong

A _________ is never recorded, so this type of investigation is generally difficult.

"dangling credit"

The theory of the __________is an asset amount that is investigated and found to be false or questionable.

"dangling debit"

__________ that contain difficult estimates to audit are very challenging to auditors

Balances

The risk of material misstatement is composed of which audit risk components?

Inherent risk and control risk.

__________ should be at an appropriately low level and focus on evaluation of _________ is on the relevant assertions identified

audit risk

An _______ contains specifications of procedures the auditors believe appropriate for the financial statements under audit.

audit strategy memorandum

Question an auditor asks when assessing ___________"What is the audit client doing when misstatements occur?" and "Are proper systems in place to prevent or detect misstatements?"

control

The probability that the client's internal control activities will fail to prevent or detect material misstatements provided they enter or would have entered the accounting system is ______ risk.

control

The professional standards break down overall audit risk into

control risk, inherent risk, and detection risk

The detection risk that auditors could allow in order to maintain the level of audit risk with which they feel comfortable ______.

decreases as the RMM increases

In the audit risk model, the assessment of inherent risk and control risk lead to a determination of __________ risk.

detection

In the audit risk model, the assessment of inherent risk and control risk lead to a determination of_________ risk.

detection

The probability that the auditor's own procedures will fail to detect material misstatements provided that any have entered the accounting system is ______ risk.

detection

Auditors can and do influence the level of ______.

detection risk only

_________ is due to intent, not error

fraud

The ___________ is primarily focused on fraud risk assessment, which is the potential for material misstatement due to fraud in the financial statements.

fraud brainstorming session`

___________ must be considered on each audit engagement and is not specifically mentioned in the audit risk model

fraud risk

Management fraud is sometimes referred to as _________ and is done by intentional misstatements in financial statements to deceive financial statement users

fraudulent financial reporting

an auditor most likely consider an inherent risk factor in planning an audit is if the entity enters into significant derivative transactions as ___________.

hedges

Even if they think control risk is _______, auditors often perform some tests of controls.

high

Inherent risk assessed and must be ____ if material misstatement is likely to enter the accounting information system

high

Assess risk of material misstatement at ___________ audit risk by performing extensive substantive tests. The objective is to perform a quality audit and keep audit risk low.

high and achieve an acceptably low

Auditors perform analytical procedures in the planning stage of an audit for the purpose of ___________ that deserve more auditing effort. This is the "attention‑directing" purpose.

identifying unusual conditions

If the account is not risky and controls are strong, the auditor could employ less effective and less costly __________

substantive audit procedures

Tests of details and analytical procedures which study plausible relationships are the two categories of_______

substantive procedures

_________ refers to WHEN the audit procedures will be completed, this is done when the auditor considers whether to complete the procedures at an interim date or at the balance sheet date.

timing

Fraudulent accounting entries always affect at least ______ account(s) and ______ place(s) in the financial statements.

two

Most firms express their audit risk ______.

using qualitative measures

Control risk slightly below the maximum is 0.60 -0.95 and the maximum control risk is ______

1.0

If sales were overstated by recording a false credit sale at the end of the year, where could you find the false "dangling debit"?

Accounts receivable.

__________ places both inherent risk and control risk on a probability continuum, regardless of whether audit risk is expressed in quantitative or qualitative terms. Most firms use low, moderate and high, but these all represent a range of numbers.

Audit theory

___________ is calculated and derived from other risks and is the amount of risk the auditor can allow

Detection risk

__________ is the risk that the auditors' own testing procedures will lead to the decision that material misstatements do not exist in the financial statements when in fact such misstatements do exist is

Detection risk.

_______ refers to the number of tests performed. Eg: the larger number of accounts receivable confirmations that are mailed to customers, the greater the chance of finding errors and fraud, and therefore, the lower the detection risk.

Extent

Credit risk must be assessed and _____ if material misstatement is NOT likely to be detected by client's internal controls

High

The likelihood that material misstatements may have entered the accounting system and not been detected and corrected by the client's internal control is referred to as___________

Risk of material misstatement.

Audit risk is evaluated at both the overall financial statement level and for each significant___________ and __________

account; disclosure

At the final review stage, ___________ procedures are designed to provide an overall test of reasonableness about the financial statements being reviewed, in light of all available evidence.

analytical review

The level of detection risk is always based on the assessment of ________

inherent and control risk

____________ is is not created by the auditors and is the susceptibility of the account to misstatement

inherent risk

The formula for the audit risk model is ______.

inherent risk × control risk × detection risk

Auditors cannot place complete reliance on __________ to the exclusion of other audit procedures

internal controls

There is an ____ relationship between risk of material misstatement and detection risk

inverse

0.10-0.45 is considered _________ control risk which is Quantitative

low

For Nature, the _________ detection risk allowed, the more effective tests; the ________ detection risk allowed, less effective tests.

lower; higher

The closer the procedures are performed to year-end (balance sheet date) the more effective they are because there is less change of a __________ occurring between the interim conformation date and year end.

material misstatement

___________ is often referred to as employee fraud. Another name for employee fraud, embezzlement, and larceny is _________

misappropriation of assets; defalcation

0.40-.70 is considered _________ control risk which is Quantitative

moderate

IF the calculated acceptable level of detection risk is _______, that means auditors could use less effective testing, and ________ means auditors need more effective testing

High; low

Auditors are not required to report all finding of errors and frauds to _________

police authorities.