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Audit Risk and Business Risk

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Questions and Answers

What is the potential effect of an auditor deciding that there is a higher inherent risk for an account?

Less audit evidence will be required for that account

More audit evidence will be required for that account (correct)

The audit risk will be decreased

The client will be refused for the audit

What happens to the cost of conducting an audit when acceptable audit risk is decreased?

The cost of conducting an audit increases (correct)

The cost of conducting an audit is unknown

The cost of conducting an audit decreases

The cost of conducting an audit remains the same

Why do some CPA firms refuse new clients in certain high-risk industries?

Due to the complexity of the industry

Due to the lack of potential revenue

Due to the high risk of material misstatement (correct)

Due to the low risk of material misstatement

What do audit firms consider when making client acceptance decisions?

The client's business risk and the risk of material misstatements Signup and view all the answers

Why do auditors assess inherent risk as high for related parties and related-party transactions?

Due to the lack of independence between the parties Signup and view all the answers

Why are transactions with related parties required to be disclosed in the financial statements?

If they are deemed to be material Signup and view all the answers

What is the primary reason why auditors consider inherent risk as high for certain industries?

Due to the high risk of material misstatement Signup and view all the answers

What is the main consideration for audit firms when deciding to accept a new client?

The risk of material misstatement Signup and view all the answers

Why do auditors assess inherent risk as high for related-party transactions?

Due to the lack of independence between the parties Signup and view all the answers

What is the main purpose of assessing inherent risk?

To determine the risk of material misstatement Signup and view all the answers