Smartbooks exam 2
The formula for the audit risk model is ______.
AR = RMM x DR
Which of the following statements are correct?
An auditor may unknowingly rely of fraudulent audit evidence Most fraudulent financial reporting involves management override of control Withholding evidence or misrepresenting information may conceal fraud
If the results of audit tests indicate a significant risk of fraud, the auditor should ______.
Consider withdrawing from the engagement
The formula auditors use to determine the appropriate level of detection risk is ______.
DR = AR / RMM
True or false: Professional skepticism is not a way to reduce judgment errors.
False
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.
Which of the following statements is correct?
Those charges with governance of the entity may be useful in providing information to the auditor
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
When an auditor has discovered fraud, ______.
a duty to disclose outside the entity exists in some circumstances
If the auditor assesses the___________ level of audit risk as being less than or equal to the____________ level of audit risk, an unqualified report can be issued.
achieved planned
Evaluations of financial information made through the study of plausible relationships among both financial and non-financial data are referred to as
analytical procedures
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
Consideration of audit risk at the account balance and disclosure levels is known by the term __________
assertion
In order to respond to pervasive risks, auditors may ______.
assign more experienced or specialized personnel to assess the risk of material misstatement due to fraud 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
Auditors should perform audits to reduce ______ risk to a sufficiently low level before expressing an opinion on the financial statements.
audit
The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated is known as ______ risk.
audit
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
To obtain information about an entity and its environment, auditors may make inquires of ______.
board of directors in-house legal counsel marketing and sales personnel internal auditors
Internal performance measures include ______.
both financial and nonfinancial indicators
The audit team is required to hold discussions, referred to as_____ ______ , about the entity's financial statements' susceptibility to fraud
brainstorming sessions
To understand the nature of the entity, auditors should obtain information about the entity's: ______.
business operations investments financing and financing activities financial reporting
Threats from significant events that could adversely affect an entity's ability to achieve its objectives and execute its strategies are
business risk
Business risk ______.
can adversely affect an entitys ability to execute its strategies is a broader concept than the risk of material misstatement
Attitudes/rationalizations that may suggest misappropriation of assets include ______.
changes in behavior of lifestyle disregard for the need to reduce misappropriation risk failure to correct known internal control deficiencies
The risk of material misstatement is also referred to as_______ risk because it stems from decisions made by the entity.
client
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 ________ risk.
control
The risk that the relevant assertions related to the account balances or disclosures contain misstatements that could be material to the financial statements consists of ______ and _____ risk.
control inherent
Misstatements arising from the misappropriation of assets is sometimes referred to as
defalcation
Internally generated performance measures include ______.
departmental performance reports comparisons to industry competitors budgets variance analysis
The effectiveness of the audit procedures and how well the procedures are applied by the auditor determines the _______ risk
detection
The risk that the auditor will not discover a material misstatement in the financial statements is known as ______ risk.
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
Which of the following areas require documentation related to the auditor's risk assessment and response?
discussion among the engagement team communication about error and fraud made to management and others evaluation of managements response to identified risk nature, timing, and extent of procedures performed to identify risks.
standards require extensive ____ of the auditor's risk assessment procedures and audit responses to identified risks.
documentation
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 risk
Unintentional misstatements of amounts or disclosures in financial statements are referred to as
errors
The primary distinction between _____and _____ is whether the misstatement was intentional or unintentional.
errors fraud
The risk of material misstatement refers to misstatements caused by ______ or _______
errors fraud
Risk factors relating to attitudes/rationalizations to report fraudulently include ______.
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 ______ misstatements
factual
True or false: Consideration of audit risk at the financial statement level is referred to by the term assertion.
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 _____ _____ triangle.
fraud risk
When both audit risk and the risk of material misstatement are low, detection risk will be ______.
high
Under which of the following circumstances may auditors have a duty to disclose fraud to an outside entity?
in response to a subpoena to a governmental funding agency to comply with legal and regulatory requirements
Misstatements due to error or fraud include ______.
inaccurate data gathering selection or application of accounting policies the auditor considers inappropriate omission of a disclosure
An employee may be motivated to misappropriate assets due to ______.
inadequate internal controls over assets the susceptibility to assets to misappropriation an adverse relationship with the employer
Which of the following conditions are generally present when material misstatements due to fraud occur?
incentive opportunity rationalization
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
At the assertion level, audit risk consists of______ risk, ______ risk and _______ risk.
inherent control detection
Steps auditors perform as part of the fraud risk assessment process include ______.
inquiries of management about their views on the risks of fraud identification and assessment of fraud risk factors understanding the entity's period-end closing process
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 controls
The use of the audit risk model ______.
involves considerable auditor judgement assists the auditor in determining the scope of audit procedures
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.
judgemental
When an auditor considers management's selection of an accounting policy to be inappropriate, a(n) _____ misstatement arises
judgmental
Auditing standards state that audit risk must be reduced to at least a ______ level.
low
The auditor should ______.
make inquiries of the internal audit function to assess their risk of fraud make direct inquiries of the audit committee when assessing 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 misstatements
If an entity's response to identified risks are inadequate, the auditor's assessment of the risk of_____ _____ may increase.
material mistatements
If management chooses not to eliminate an identified material misstatement, appropriate audit opinions include ______.
modified qualified adverse
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.
more
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 profitability expectation of external parties high degree of competition or market saturation
Audit evidence is subject to human error which is referred to as __________ risk.
nonsampling
Market-share growth and excellent service and reputation are examples of business
objectives
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
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 are _____ risks in that they apply to multiple components of the financial statements.
pervasive
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
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
Many public accounting firms find it appropriate to use ______ in the audit risk model.
qualitative terms
Observation and inspection audit procedures include ______.
reading management reports tracing transactions through the information system visits to the entitys premises and plant facilities
The PCAOB states that, as a part of understanding the entity, auditors should consider ______.
reading relevant public information about the company obtaining an understanding of compensation arrangements with senior management obtaining information about significant unusual developments regarding trading activity in the company's securities
Understanding and assessing the effectiveness of an entity's internal control assists the auditor in ______.
recognizing factors that affect the risks of material misstatements identifying types of potential mistatements designing appropriate audit procedures
If an entity's response to identified risks is adequate, the risk of material misstatement may be ______.
reduced
Industry,______ and other _____factors are relevant to the auditor's understanding of an entity.
regulatory external
To help understand the entity and identify the risks of material misstatements, the auditor should consider_____ ,______ and other external factors.
regulatory industry
To help understand the entity and identify the risks of material misstatements, the auditor should consider_______ ______ and other external factors
regulatory industry
When auditing a public company, the auditor is generally responsible to disclose fraud to the ______.
senior management 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
Identify the three steps involved in the auditor's use of the audit risk model at the assertion level.
setting a planned level of audit risk assessing the risk of material misstatement solving the audit risk equation for the appropriate level of detection risk
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
strategy
Being the low-cost or high-quality provider of a product are examples of business .
strategy
If an auditor has determined that material misstatements were or may have been the result of fraud and is unable to determine if the effect is material, the auditor should ______.
suggest that the appropriate level of management consult with legal consel consider implications for other aspects of the audit attempt to obtain evidence in order to determine whether material fraud has occurred and its effect
Items that may result in significant risks include ______.
the application of new accounting standards highly complex transactions significant accounting estimates and judgments
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
Examples of misappropriation of assets include ______.
using an entitys assets for personal use stealing physical assets and intellectual property embezzling cash received
