Chapter 4 smartbook
The formula auditors use to determine the appropriate level of detection risk is ______.
DR = AR ÷ RMM
Which of the following statements are correct?
Most fraudulent financial reporting involves management override of controls. Withholding evidence or misrepresenting information may conceal fraud. An auditor may unknowingly rely on fraudulent audit evidence.
Which of the following statements are correct?
The fraud discussion can be part of the discussion of understanding the entity and its environment. The engagement partner or manager should communicate the potential for misstatements from fraud to the audit team.
The auditor should evaluate whether the entity's selection and application of accounting principles are appropriate for its business.
True
If management chooses not to eliminate an identified material misstatement, appropriate audit opinions include ______.
adverse modified qualified
Evaluations of financial information made through the study of plausible relationships among both financial and nonfinancial data are referred to as
analytical procedures
Auditors assess the risk of material misstatement at the ______ level.
assertion
Identify the three steps involved in the auditor's use of the audit risk model at the assertion level.
assessing the risk of material misstatement setting a planned level of audit risk determining the appropriate level of detection risk
An active role in the oversight of the assessment of the risk of fraud should be assumed by the ______.
audit committee
Whenever the auditor finds evidence of fraud that causes a material misstatement of the financial statements, it should be reported directly to the ______.
audit committee
The possibility that an auditor will issue an unqualified opinion on materially misstated financial statement is called .
audit risk
Internal performance measures include ______.
both financial and nonfinancial indicators
the audit team is required to hold discussions, referred to as , ________ sessions, about the entity's financial statements'
brainstorming
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 of material misstatement is also referred to as ______ risk because it stems from decisions made by the entity.
client
Which of the following areas require documentation related to the auditor's risk assessment and response?
communication about error and fraud made to management and others. nature, timing, and extent of procedures performed to identify risks discussion among the engagement team evaluation of management's response to identified risk
Internally generated performance measures include ______.
comparisons to industry competitors variance analysis departmental performance reports budgets
Risk factors relating to opportunities to report fraudulently include Blank______.
complex or unstable organizational structure significant related party transactions financial numbers based on subjective judgments or uncertainties
Steps auditors perform as part of the fraud risk assessment process include Blank______.
consideration of unusual or unexpected relationships inquiries of the audit committee about their views on the risks of fraud team member discussions regarding the risk of material misstatement
The 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?
control risk
Misstatements arising from the misappropriation of assets is sometimes referred to as
defalcation
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 is known as ______ risk.
detection
The effectiveness of the audit procedures and how well the procedures are applied by the auditor determines the ?
detection risks
Standards require extensive______ of the auditor's risk assessment procedures and audit responses to identified risks.
documentation
Unintentional misstatements of amounts or disclosures in financial statements are referred to as
errors
The risk of material misstatement refers to misstatements caused by
errors or fraud
In order to respond to pervasive risks, auditors may Blank______.
evaluate whether the selection and application of accounting policies by the entity may create a material misstatement incorporate an element of unpredictability in the audit procedures assign more experienced or specialized personnel to assess the risk of material misstatement due to fraud
Risk factors relating to attitudes/rationalizations to report fraudulently include Blank______.
excessive management interest in increasing entity stock prices ineffective communication and enforcement of ethical values claims against board members alleging fraud
An auditor tests an invoice for services provided and determines that the amount charged is incorrect. This is an example of a ______ misstatement.
factual
Misstatements about which there is no doubt are called
factual misstatements
Observation and inspection audit procedures should be limited to current activities performed inside the organization without considering outside sources.
false
Professional skepticism is not a way to reduce judgment errors.
false
Standards require limited documentation of the auditor's risk assessment procedures, including fraud risk assessment, and audit responses to identified risks.
false
An intentional act involving the use of deception that results in an misstatement in the financial statements is referred to as
fraud
Incentive, opportunity, and rationalization are three conditions that are sometimes referred to as the
fraud risks triangle
Steps auditors perform as part of the fraud risk assessment process include ______.
identification and assessment of fraud risk factors inquiries of management about their views on the risks of fraud understanding the entity's period-end closing process
Which of the following conditions are generally present when material misstatements due to fraud occur?
incentive opportunity rationalization
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
Detection risk has a(n) ______ relationship to inherent and control risk.
inverse
Business risk ______.
is a broader concept than the risk of material misstatement can adversely affect an entity's ability to execute its strategies
An auditor determines that the percentage of allowance for bad debts set by management is unreasonably low based on past experience. This is an example of a ______ misstatement.
judgmental
When an auditor considers management's selection of an accounting policy to be inappropriate, a(n)
judgmental misstatement arises
The auditor should ______.
make direct inquiries of the audit committee when assessing risk of fraud make inquiries of the internal audit function to assess their risk of fraud inquire about management's knowledge of fraud within the entity
Who addresses business risks by implementing a risk assessment process?
management
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
nonsampling risk
If the achieved level of audit risk is greater than the planned level, auditor options include ______.
performing additional audit work modifying the audit opinion
Financial statement level risks apply to multiple components of the financial statements meaning they are
pervasive risk
An objective of brainstorming with the audit team is emphasizing the importance of maintaining _______________ throughout the audit regarding the potential for material misstatement due to fraud
professional skepticism
Risk factors relating to incentives/pressures to report fraudulently include ______.
profitability expectations of external parties high degree of competition or market saturation need to obtain debt or equity financing
An auditor uses the misstatements identified in an audit sample to estimate the misstatements in the entire population. This is an example of a ______ misstatement.
projected
The auditor's best estimate of misstatements in populations are called
projected misstatements
The greater the incentive or pressure, the more likely an individual will be able to Blank______.
rationalize the acceptability of committing fraud
The greater the incentive or pressure, the more likely an individual will be able to ______.
rationalize the acceptability of committing fraud
If an entity's response to identified risks is adequate, the risk of material misstatement may be ______.
reduced
When auditing a public company, the auditor is generally responsible to disclose fraud to the ______.
senior management and audit committee
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 require a higher
set a lower level
Examples of misappropriation of assets include ______
stealing physical assets and intellectual property embezzling cash received using an entity's assets for personal use
Which of the following is not a situation where the auditor should understand the entities selection and application of accounting principles?
the methods the entity uses to account for significant transactions within the normal course of business
Observation and inspection audit procedures include ______.
tracing transactions through the information system reading management reports visits to the entity's premises and plant facilities
If the uncorrected total misstatements identified during the audit process do not cause the financial statements to be materially misstated, auditors should issue a(n) ______ opinion.
unqualified