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