Chapter 4

When auditing a public company, the auditor is generally responsible to disclose fraud to the ______.

-senior management -audit committee

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

DR = AR ÷ RMM

An active role in the oversight of the assessment of the risk of fraud should be assumed by the ______.

audit committee

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. -Evaluation of management's response to identified risk. -Discussion among the engagement team. -Nature, timing and extent of procedures performed to identify risks.

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.

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.

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

Fill in the blanks to complete the sentence. 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

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

audit

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

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

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

detection

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

detection

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

fraud risk

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

The susceptibility of an assertion in an account or disclosure to a misstatement due to error or fraud that could be material, either individually or in combination with other misstatements, before consideration of any related controls ____ risk.

inherent

Which of the following statements are correct?

-Auditors must consider the reliability of internal performance measures before using them for purposes of the audit. -Internal performance measures provide information about progress towards meeting entity objectives. -A deviation in the entity's performance measures may indicate a risk of misstatement in the related financial information.

If management chooses not to eliminate an identified material misstatement, appropriate audit opinions include ______.

-adverse -qualified -modified

Internally generated performance measures include ______.

-budgets -departmental performance reports -comparisons to industry competitors -variance analysis

The risk of material misstatement refers to misstatements caused by _____ or _____.

-error -fraud

The primary distinction between _____ and _____ is whether the misstatement was intentional or unintentional. (Enter only one word per blank.)

-errors -fraud

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

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

Risk factors relating to opportunities to report fraudulently include ______.

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

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

-incentive -opportunity -rationalization

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 -control

At the assertion level, audit risk consists of _____ risk, _____ risk, _____ risk.

-inherent -detection -control

The auditor should ______.

-inquire about management's knowledge of fraud within the entity -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

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

-investments -business operations -financial reporting -`financing and financing activities

Observation and inspection audit procedures include ______.

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

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: Observation and inspection audit procedures should be limited to current activities performed inside the organization without considering outside sources.

False

Who addresses business risks by implementing a risk assessment process?

Management

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

audit

The audit team is required to hold discussions referred to as ______________ _______________ about the entity's financial statements' susceptibility to fraud.

brainstorming sessions

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

The effectiveness of the audit procedures and how well the procedures are applied by the auditor determines the _____ 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

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

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

Auditors should ask the ______ about its assessment of the risk of fraud, including whether management has satisfactorily responded to internal audit findings during the year.

internal audit function

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.

judgemental

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

material misstatement

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

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

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