Chapter 4 audit

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 management's response to identified risk.

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

At the assertion level, audit risk consists of

inherent risk, control risk, and detection risk

Steps auditors perform as part of the fraud risk assessment process include ______.

inquiries of the audit committee about their views on the risks of fraud team member discussions regarding the risk of material misstatement consideration of unusual or unexpected relationships

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

Financial statement level risks are ________ risks in that they apply to multiple components of the financial statements.

pervasive

The auditor's best estimate of misstatements in populations are called

projected misstatement

Which of the following conditions are generally present when material misstatements due to fraud occur?

Rationalization Opportunity Incentive

Under which of the following circumstances may auditors have a duty to disclose fraud to an outside entity?

To comply with legal and regulatory requirements. In response to a subpoena. To a governmental funding agency.

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

analytical procedure

Internal performance measures include ______.

both financial and nonfinancial indicators

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

business operations investments financial reporting financing and financing activities

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

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 ______.

consider the implications for other aspects of the audit attempt to obtain evidence in order to determine whether material fraud has occurred and its effect suggest that the appropriate level of management consult with legal counsel

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

detection

Attitudes/rationalizations that may suggest misappropriation of assets include ______.

failure to correct known internal control deficiencies changes in behavior of lifestyle disregard for the need to reduce misappropriation risk

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

judgmental misstatement

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

low

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

lower

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

nonsampling risk

The possibility that an auditor will issue an unqualified opinion on materially misstated financial statement is called

Audit Risk

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

actual, planned

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

assertion

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

The risk of material misstatement refers to misstatements caused by

errors or fraud

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

fraud

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

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

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 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

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

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

Auditors assess the risk of material misstatement at the

assertion level

Items that may result in significant risks include ______.

assertions identified with fraud risk factors revenue recognition industry specific issues

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

audit risk

Understanding and assessing the effectiveness of an entity's internal control assists the auditor in ______.

designing appropriate audit procedures identifying types of potential misstatements recognizing factors that affect the risks of material misstatements

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 ______ _________

detection risk

In order to respond to pervasive risks, auditors may ______.

evaluate whether the selection and application of accounting policies by the entity may create a material misstatement assign more experienced or specialized personnel to assess the risk of material misstatement due to fraud incorporate an element of unpredictability in the audit procedures

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

factual misstatement

Misstatements about which there is no doubt are called

factual misstatement

The greater the incentive or pressure, the more likely an individual will be able to ______.

rationalize the acceptability of committing fraud

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

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

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

reduced

Risk factors relating to opportunities to report fraudulently include ______.

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

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

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

business objective

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

client

The risk of material misstatement is also referred to as _______ ______because it stems from decisions made by the entity.

client risk

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 ____ ____

detection risk

Incentive, opportunity and rationalization are three conditions that are sometimes referred to as the

fraud risk triangle

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

high

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

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

Items that may result in significant risks include pt 2

highly complex transactions the application of new accounting standards significant accounting estimates and judgments

Misstatements due to error or fraud include ______.

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

An employee may be motivated to misappropriate assets due to ______.

inadequate internal controls over assets an adverse relationship with the employer the susceptibility of assets to misappropriation

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.

inherent and control

The use of the audit risk model ______.

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

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

modifying the audit opinion performing additional audit work

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

qualitative