Ch.4

The susceptibility of an assertion in an account or disclosure to a misstatement due to error or fraud that could be material is known as ______ risk.

Inherent

Examples of misappropriation of assets include:

stealing physical assets and intellectual property embezzling cash received using an entity's assets for personal use

Observation and inspection audit procedures include ______.

tracing transactions through the information system visits to the entity's premises and plant facilities reading management reports

The formula for the audit risk model is ______.

AR = RMM x DR

The risk of material misstatement is also referred to as____ risk because it stems from decisions made by the entity

Client

e formula auditors use to determine the appropriate level of detection risk is ______.

DR = AR/RMM

The risk that the auditor will not discover a material misstatement in the financial statements is known as ______ risk

Detection

True or false: At the completion of the audit, the actual or achieved level of audit risk is known with certainty by the auditor.

False

True or false: Consideration of audit risk at the financial statement level is referred to by the term assertion.

False

True or false: Observation and inspection audit procedures should be limited to current activities performed inside the organization.

False

True or false: Professional skepticism is not a way to reduce judgment errors.

False

To obtain information about an entity and its environment, auditors may make inquires of ______.

Internal auditors in-house legal counsel marketing and sales personnel board of directors

Who addresses business risks by implementing a risk assessment process?

Management

Which of the following statements is correct?

Those charged with governance of the entity may be useful in providing information to the auditor.

Business risk ______.

an adversely affect an entity's ability to execute its strategies is a broader concept than the risk of material misstatement

The auditor should develop expectation about plausible relationships that are expected to exist when performing preliminary

analytical procedures

Auditors assess the risk of material misstatement at the ______ level.

assertion

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated is known as ______ risk.

audit

Risk factors relating to attitudes/rationalizations to report fraudulently include ______.

board members alleging fraud ineffective communication and enforcement of ethical values excessive management interest in increasing entity stock prices

Internal performance measures include ______.

both financial and nonfinancial indicators

Threats from significant events that could adversely affect an entity's ability to achieve its objectives and execute its strategies are

business risks

The risk that a misstatement could occur in an assertion and would not be prevented, or detected and corrected, on a timely basis by the entity's internal control is known as ______ risk.

control

he risk that a material account or disclosure assertion will not be prevented, detected or corrected on a timely basis by the entity's internal control is____ risk

control

Misstatements arising from the misappropriation of assets is sometimes referred to as

defalcation

Substantive audit procedures that will reduce audit risk to an acceptably low level are designed using the planned level of____ risk

detection

The auditor can manipulate ______ risk by changing the scope of the auditor's test procedures.

detection

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 exists is known as ______ risk.

detection

he effectiveness of the audit procedures and how well the procedures are applied by the auditor determines the____ risk

detection

An auditor tests an invoice for services provided and determines that the amount charged is incorrect. This is an example of a ______ misstatement.

factual

When an auditor considers management's selection of an accounting policy to be inappropriate, a(n)___ ____ misstatement arisses

judgemental

Auditing standards state that audit risk must be reduced to at least a ______ level.

low

The combination of inherent risk and control risk is referred to in auditing standards as the risk of

material misstatement

Audit evidence is subject to human error which is referred to as____risk

nonsampling

The PCAOB states that, as a part of understanding the entity, auditors should consider ______.

obtaining information about significant unusual developments regarding trading activity in the company's securities reading relevant public information about the company obtaining an understanding of compensation arrangements with senior management

Misstatements due to error or fraud include ______.

omission of a disclosure inaccurate data gathering selection or application of accounting policies the auditor considers inappropriate

An auditor makes inquiries of an entity's customers and discovers the customers received large quantities of unordered products just before year-end. This is an indicator of ______.

overstated revenues

Evaluations of financial information made through the study of plausible relationships among both financial and non-financial data are referred to as

Analytical procedures

Auditors should perform audits to reduce ______ risk to a sufficiently low level before expressing an opinion on the financial statements.

Audit

The susceptibility of a material account or disclosure assertion to a misstatement due to fraud or error, before considerations of any related controls is _____ risk

Inherent

True or false: Detection risk has an inverse relationship to inherent and control risk.

True

True or false: Inquiries of others outside the entity may provide information that assists the auditor in uncovering fraud.

True

Consideration of audit risk at the account balance and disclosure levels is known by the term____

assertion

The use of the audit risk model ______.

assists the auditor in determining the scope of audit procedures involves considerable auditor judgment

Although some control can be exercised through the careful acceptance and continuance of clients_____Risk cannot be directly controlled by the auditor.

engagement

The risk that the auditor is exposed to financial loss or damage to their professional reputation in connection with the audited financial statements is known as ______.

engagement

Unintentional misstatements of amounts or disclosures in financial statements are referred to as

error

he risk of material misstatement refers to misstatements caused by_____ or _____

error or fraud

An intentional act involving the use of deception that results in an misstatement in the financial statements is referred to as

fraud

When both audit risk and the risk of material misstatement are low, detection risk will be ______.

high

When compared to a high level of detection risk, a low level of detection risk implies that the investigation of an account will be ______ thorough.

high

To help understand the entity and identify the risks of material misstatements, the auditor should consider____and other external factors

industry, regulatory

An active and qualified board of directors, proper authorization of transactions and procedures to ensure assets exist are all examples that may be part of an entity's

internal control

The entity's policies and procedures designed to provide reasonable assurance about the achievement of the entity's objectives is labeled

internal control

To understand the nature of the entity, auditors should obtain information about the entity's: ______.

investments business operations financial reporting financing and financing activities

If an entity's response to identified risks are inadequate, the auditor's assessment of the risk of____ ____ may increase

materiala misstatement

If the achieved level of audit risk is greater than the planned level, auditor options include ______.

modifying the audit opinion performing additional audit work

The auditor should obtain information about the conduct of operations, joint ventures, planned acquisitions, and major subsidiaries as part of learning about the ______.

nature of the entity

Risk factors relating to incentives/pressures to report fraudulently include ______.

need to obtain debt or equity financing high degree of competition or market saturation profitability expectations of external parties

Market-share growth and excellent service and reputation are examples of business

objective

Many public accounting firms find it appropriate to use ______ in the audit risk model.

qualitative terms

If an entity's response to identified risks is adequate, the risk of material misstatement may be ______

reduced

If inherent and control risks are high, in order to achieve the planned level of audit risk, the auditor will ______ level of detection risk.

set a lower

Risk factors relating to opportunities to report fraudulently include ______.

significant related party transactions complex or unstable organizational structure financial numbers based on subjective judgments or uncertainties

being the low-cost or high-quality provider of a product are examples of business

strategies

Being the low-cost or high-quality provider of a product are examples of business

strategy

Examples of misappropriation of assets include ______.

using an entity's assets for personal use embezzling cash received stealing physical assets and intellectual property