Audit Risk Concepts and Models

False (B)

Incentive, opportunity, and attitude/rationalization.

<p>management</p> Signup and view all the answers

<p>Excessive pressure to meet expectations = Incentive/Pressure Ineffective monitoring of management = Opportunity Nonfinancial management's excessive participation = Attitude/Rationalization Complex organizational structure = Opportunity</p> Signup and view all the answers

<p>Complex or unstable organizational structure (A)</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>Industry conditions, regulatory environment, and other external factors.</p> Signup and view all the answers

<p>Financial Statement Level, Assertion level, Individual account balance or disclosure level (B)</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>Audit Risk = Inherent Risk * Control Risk * Detection Risk</p> Signup and view all the answers

<p>Inherent Risk, Control Risk</p> Signup and view all the answers

<p>Inherent Risk = An error due to factors other than internal control failures Control Risk = Risk of misstatement not detected by internal control Detection Risk = Risk that auditors fail to detect misstatements Engagement Risk = Exposure to financial loss and damage to reputation</p> Signup and view all the answers

<p>Assessing risk is straightforward and always accurate (A)</p> Signup and view all the answers

<p>Intentional omission from financial statements (A), Manipulation of accounting records (C)</p> Signup and view all the answers

<p>True (A)</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>Obtain evidence and further investigate</p> Signup and view all the answers

<p>Inquiries of management and others, Analytical procedures</p> Signup and view all the answers

<p>misstatements</p> Signup and view all the answers

<p>Assign more experienced personnel = To handle riskier audit areas Evaluate selection of accounting policies = To ensure they are applied correctly Make audit procedures unpredictable = To enhance the effectiveness of the audit Communicate with the audit committee = To discuss findings related to fraud</p> Signup and view all the answers

<p>Assign more experienced personnel (D)</p> Signup and view all the answers

<p>True (A)</p> Signup and view all the answers

<p>The audit committee</p> Signup and view all the answers

<p>Confirmation (C)</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>Existence and Completeness</p> Signup and view all the answers

<p>Reperformance</p> Signup and view all the answers

<p>Inspection of records = Review of physical documents for accuracy Inquiry = Asking questions to gather information Recalculation = Checking mathematical accuracy of records Analytical procedures = Evaluating financial information across different data</p> Signup and view all the answers

<p>Perform test of controls (C)</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>Form of confirmation, prior experience with entity, nature of information, intended respondent</p> Signup and view all the answers

<p>To obtain evidence about assertions related to account balances or transaction classes (B)</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>Trend analysis, Ratio analysis, Reasonableness analysis</p> Signup and view all the answers

<p>current</p> Signup and view all the answers

<p>Current Ratio = Short-term liquidity Receivable Turnover = Activity Ratio Gross Profit Percentage = Profitability Ratio Quick Ratio = Short-term liquidity</p> Signup and view all the answers

<p>Financial and operating data (A)</p> Signup and view all the answers

<p>True (A)</p> Signup and view all the answers

<p>Significance of account</p> Signup and view all the answers

<p>Historical files (D)</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>Independent source outside the entity and effectiveness of internal control</p> Signup and view all the answers

<p>sufficiency</p> Signup and view all the answers

<p>Nature of audit evidence = The type or form that evidence takes Sufficiency = Quantity of audit evidence needed Appropriateness = Quality of audit evidence Evaluation = Assessment of the evidence collected</p> Signup and view all the answers

<p>Supplier invoices (B)</p> Signup and view all the answers

<p>False (B)</p> Signup and view all the answers

<p>To provide support for the audit report and assist in planning, performance, and supervision.</p> Signup and view all the answers

The risk that an auditor expresses an inappropriate opinion when financial statements are materially misstated.

Audit Risk = Inherent Risk * Control Risk * Detection Risk

Potential misstatement due to factors other than internal control failures.

Risk of a misstatement in an assertion not caught by internal controls.

Risk that the auditor won't detect misstatements.

Combined inherent and control risk that might lead to a material misstatement.

Identifying business risks and potential misstatements through inquiries, analytical procedures, and observations.

Using inquiries of management, analytical procedures, and observations to understand risks.

Conditions that increase the probability that fraud will occur in an entity.

Intentional misstatements by management to deceive users of financial statements.

Factors pushing management to commit fraud, often linked to financial stability/profitability threats or personal gain.

Factors enabling fraud, such as flawed internal controls or improper oversight.

Factors explaining why management justifies or rationalizes committing fraud, often relating to ethical lapses or pressure to meet expectations.

Process of recognizing potential for fraudulent behavior, involving communication, investigation and analytical procedures.

Inaccurate or misleading information in financial statements, categorized as either errors or fraud.

Unintentional mistake in financial statements.

Intentional misstatements in financial statements, including manipulating accounting records, misrepresenting events or transactions, and misapplying accounting principles.

Theft of an entity's assets that leads to misstatements in financial statements.

Auditors should assign more experienced personnel, evaluate accounting policies, and make audit procedures unpredictable, adding elements of surprise.

A misstatement in financial statements that is significant enough to influence a user's judgment.

If material misstatement exists, the auditor should request management to fix it. If management doesn't respond, the auditor issues a qualified or adverse opinion.

Gather more evidence, discuss the matter with management, conduct further investigation, suggest management consult with legal counsel, and consider withdrawing from the engagement.

The auditor should document discussions among engagement personnel, procedures to identify risks, fraud risks that require extra audit procedures, and communications about fraud.

When fraud is discovered, the appropriate level of management should be informed. For senior management involvement, the audit committee should be informed directly.

Information gathered by an auditor to support the opinion on the fairness of financial statements. This evidence is used to determine if management's assertions are accurate.

Statements made by management about components of financial statements, assuring they are presented fairly, accurately, and in compliance with accounting principles.

Specific claims made by management about the accuracy and existence of individual account balances on the balance sheet.

Statements made by management about the completeness and accuracy of information presented in financial statements, including footnotes and other disclosures.

A methodical approach used by auditors to gather sufficient and appropriate audit evidence to test classes of transactions or significant balances. This hierarchy includes testing controls, substantive procedures, and risk assessment procedures.

Procedures performed by an auditor to gain an understanding of the entity and its environment, including internal controls, to identify and assess risks of material misstatement.

Procedures performed by an auditor to test the effectiveness of internal controls in preventing or detecting misstatements in financial statements.

Procedures performed by an auditor to obtain evidence directly related to the fairness of financial statements and to detect misstatements.

An imaginary container used to visualize the amount of evidence needed to provide reasonable assurance to an auditor that financial statements are fairly presented.

To identify potential misstatements in financial statements by comparing expected and actual results, and to understand the business and plan the audit.

There are three types: Risk Assessment, Substantive, and Final. Risk Assessment helps understand the business. Substantive gathers evidence on assertions. Final reviews final financial information.

A series of steps to conduct substantive analytical procedures: 1) Develop an expectation, 2) Define a tolerable difference, 3) Compare expectations and recorded amounts, 4) Investigate differences, 5) Accept amount, and 6) Document results.

Expectations can be based on financial and operating data, budgets, forecasts, competitor information, or other relevant sources.

The maximum acceptable difference between the expectation and recorded amount, influenced by factors like significance of the account and desired level of reliance.

Measure a company's ability to meet its short-term obligations, including current ratio, quick ratio, and operating cashflow ratio.

Measure a company's profitability, such as gross profit percentage, profit margin, return on assets, and return on equity.

A financial ratio that measures the amount of debt a company uses to finance its assets relative to the amount of equity. It represents the proportion of debt to equity in a company's capital structure.

This ratio measures a company's ability to meet its interest obligations with its current earnings before interest and taxes. It shows how many times a company’s earnings cover its interest expense.

The type of evidence that supports the auditor's opinion on financial statements. It encompasses the form and content of the evidence, such as invoices, contracts, or minutes of meetings.

The quantity of audit evidence required to provide sufficient basis for the auditor's opinion. This depends on the level of risk - higher risk requires more evidence.

The quality of audit evidence and its relevance and reliability in supporting an assertion. It reflects how persuasive and useful the evidence is.

Evidence from a source outside the entity that is not influenced by the company. It is considered more reliable because it is less subject to manipulation.

Audit documentation serves as a record of the audit process, provides support for the audit report, and helps reviewers understand the work performed. It's like a story of the audit journey.

Audit documentation can be categorized into permanent files (information that remains relevant for several audits) and current files (specific to a particular audit).