Chapter 4 Smartbook

Which of the following statements regarding audit risk are correct?

The focus on evaluating audit risk is on the relevant assertions identified. Audit risk should be at an appropriately low level.

Analytical procedures are required ______.

at the end of the audit at the beginning of the audit

All companies trading on the stock exchanges are required to have a(n)___________ which consists of independent, outside members of the board of directors who can provide a buffer between the audit firm and management,

audit committee

Risks that could adversely affect a company's ability to achieve its objectives and execute its strategies are called ____ risks

business

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

Another name for employee fraud, embezzlement, and larceny is

defalcation

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

Using the audit risk model, the auditor must adjust___ risk for significant accounts and relevant disclosures.

detection

If the potential for fraud is high, auditors should perform _____ assessments including targeting tests towards higher risk areas, and performing more tests of transactions at year end, rather than interim points

extended procedures

By definition ____ risks are significant risks.

fraud

Knowing industry characteristics ______.

includes knowledge of the client's competition relates to differences in production and marketing activities

The basis for executing an appropriate response to identified risks is ______ risk assessment.

inherent

The exposure or susceptibility of an assertion within an entity's financial statements to a material misstatement without regard to the system of internal controls is ____risk.

inherent

The probability that, in the absence of internal controls, material errors or frauds could enter the accounting system used to develop financial statements is ______ risk.

inherent

The key difference between error and fraud is ______.

intent

Audit teams are concerned ______.

only with fraudulent activity that results in materially misstated financial statements

At the preliminary stage, analytical procedures are ___ tests

reasonableness

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

reduces

General business sources include ______.

registration statements and 10-K filings business newspapers specialized trade magazines and journals

Audit risk is evaluated at both the overall financial statement level and for each significant_____ and ______.

account disclosure

Valuation of investment securities, deprecation, and net realizable value of accounts receivable are all examples of

accounting estimates

In the audit risk model ______.

AR = IR × CR × DR detection risk is based on the desired level of audit risk and assessed levels of inherent and control risk

Which of the following statements are true regarding assessing the risk of fraud?

Balances that contain difficult estimates to audit are very challenging for auditors. The theory of the "dangling debit" is an asset amount that is investigated and found to be false or questionable.

Which of the following statements are correct?

Most business risks are eventually reflected in the financial statements. Auditors devote significant time to understanding client's business risks.

When auditors develop an expectation about what an account balance should be and compare the expectation to the recorded analysis, the auditor is performing a preliminary

analytical procedure

White-collar crimes may ______ the organization.

be perpetrated by or upon

When completing analytical procedures, an auditor should define a significant difference ______ comparing expectations with recorded amounts.

before

On every audit engagement, the risk assessment process includes required___ sessions in which critical audit areas are discussed.

brainstorming

When thinking about each of the relevant financial statement assertions, the auditor should focus on what ______.

can go wrong

Fraud risk ______.

can never be ignored

General business sources ______

can relate to an industry or individual company

Auditors ______.

cannot place complete reliance on internal controls to the exclusion of other audit procedures would not seem to exhibit due professional case if the level of audit risk was too high

Existence is riskier than completeness for ______.

cash

A fraud under the materiality threshold level that the manager determines is "clearly inconsequential" should be ______.

reported to management above the level of the people involved

Factors related to the susceptibility of accounts to misstatement or fraud include ______.

complexity liquidity

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

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

In the audit risk model, the assessment of inherent risk and ___risk lead to a determination of___risk

control detection

Auditing standards use the term ______ to refer to misappropriation of assets.

defalcation

Auditors can and do influence the level of _____

detection risk only

Regardless of when analytical procedures are performed, testing is concluded by ______.

documenting team findings

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

Misappropriating funds or other property from one's boss in the definition of

employee fraud

An unintentional misstatement or financial statement omission is referred to as a(n) ______.

error

Issues of particular importance in times of economic distress include ______.

fair value measurements inventory goodwill impairment revenue recognition

True or false: A company's failure to provide minutes is not considered a significant scope limitation.

false

True or false: Accounting estimates are not a concern because they are generally too small to have a material affect on financial statements.

false

According to professional auditing standards, which of the following is NOT a type of audit risk?

fraud

The act of knowingly making material misrepresentations of fact with the intent of inducing someone to believe and act on it is the definition of

fraud

Auditors must examine journal entries and other adjustments, especially those made close to year end, as part of their_____ assessment.

fraud risk

Auditors have a responsibility to detect ______.

fraudulent activity that results in materially misstated financial statements

Intentional misstatements in financial statements to deceive financial statement users is the definition of

fraudulent financial reporting

Interviewing the entity's management, internal auditors, directors, audit committee and other employees ______.

helps bring auditors up to date on business and industry changes is a required audit procedure provides information on personnel competence and integrity

A company's performance measures ______.

identify what managers deem as key indicators of company performance might indicate qualitative factors to consider when determining materiality

When performing risk assessment procedures, the first step auditors often take it to assess____ risk for each relevant assertion related to each of the significant accounts and disclosures identified on an audit engagement

inherent

The components of the risk of material misstatement (RMM) are ___risk and ____risk.

inherent control

The formula for the audit risk model is ______

inherent risk × control risk × detection risk

There is a(n) ______ relationship between RMM and detection risk.

inverse

Finding out a client is planning to acquire another company ______.

is a component of understanding the nature of the company results in additional risks for the auditor

Business risk assessment ______.

is an important component of an audit makes auditors more knowledgeable about the client's business and environment may involve asking production personnel about labor problems

Detection risk ______.

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

Inherent risk ______.

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

When an employee misappropriates funds or property not entrusted to his or her custody, an act of________ or simple theft has occurred.

larceny

Employee fraud can be classified as either_____ or ____

larceny embezzlement

Investigating significant differences at the preliminary stage ______.

may be considered attention directing help auditors identify risks as an aid in preparing the audit plan can be used to plan additional audit work

Company discussion boards ______.

may be used by anonymous whistle-blowers

When developing an expectation of an account balance, auditors ______.

may consider relevant nonfinancial information may consider third party information may use vertical and horizontal analysis

A misstatement in the financial statements may be caused by a(n)____or_____.

mistake fraud

With respect to accounting estimates, auditors are responsible for ______.

monitoring differences between estimates and audit evidence looking for indications of systematic bias

Fraud risk ______.

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

When doing fraud risk assessment, auditors ______.

must presume improper revenue recognition is a risk

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____ , the____ , and the _____of further audit procedures.

nature timing extent

The assessment of inherent risk ______.

needs to occur for each significant financial statement account and disclosure needs to be evaluated without regards to internal controls

Errors are ______ considered fraud.

never

Examples of business risks include ______.

new products and services industry developments business expansion

Typical ways that companies cause financial statements to be misstated through fraud of aggressive financial reporting include ______.

omitting important information from disclosures overstating assets or understating liabilities

Due to the importance of industry characteristics, most large public accounting firms ______.

organize their audit staff by industry

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

permissible, but rarely done

Determining if transactions with them have been properly accounted for and disclosed in the financial statements is th auditor's primary objective in regards to

related parties

Individuals or organizations that can influence or be influenced by decisions of the company, possibly through family ties or investment relationships are called

related parties

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

Items that must be documented in the working papers during the risk assessment process include ______.

results of audit procedures, particularly procedures regarding management override procedures to identify and assess risk specific risks identified and audit team responses

The comprehensive identification of "what could go wrong" for each relevant financial statement assertion is the foundation for the ______ process and ultimately the audit plan

risk assessment

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

Risks that require special audit consideration because of the nature of or likelihood and potential magnitude of misstatement related to the risk are called ___risks.

significant

Factors related to the susceptibility of accounts to misstatement or fraud include ______.

size of account balance the volume of transactions

A well planned and carefully performed audit ______ audit risk.

still has some

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

substantive procedures

Auditors are able to reduce detection risk by completing more and stronger ______.

substantive tests

True or false: Audit team brainstorming sessions are a required audit engagement component.

true

True or false: Audit theory places both inherent risk and control risk on a probability continuum, regardless of whether audit risk is expressed in quantitative or qualitative terms.

true

True or false: Auditors need to evaluate the overall reasonableness of the effect of all estimates taken together when managements' estimates all exhibit conservatism.

true

True or false: The professional statements make clear that risk assessment underlies the entire audit process.

true

True or false: The purpose of obtaining an understanding of the company's performance measures is to look for key indicators that may affect the risk of material misstatement

true

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

two, two

Knowing if a client is centralized or decentralized is a component of ______.

understanding the nature of the company

Most firms express their audit risk ______.

using qualitative measures

Calculating common size statements in which amounts are calculated as percentages of a base such as sales or total assets is called ___analysis.

vertical

The misdeeds of people who steal with a pencil or computer terminal are known as ____ crimes

white collar