The auditor uses the assessed level of control risk (together with the assessed level of inherent risk) to determine?the assessed risk of material misstatement, which in turn affects the acceptable level of detection risk for financial statement assertionsControl risk should be assessed in terms of?The auditor identifies internal controls relevant to specific financial statement assertions, and then performs tests of controls to evaluate their effectiveness in preventing material misstatements in those assertions. Control risk should be assessed in terms of financial statement assertions.The acceptable level of detection risk is inversely related to the?The acceptable level of detection risk is inversely related to the assurance provided by substantive tests. For example, if the acceptable level of detection risk decreases, more assurance is required from substantive tests.As the acceptable level of detection risk increases, the assurance (effectiveness) that must be provided from substantive tests can?DecreaseAs the acceptable level of detection risk decreases, the assurance directly provided from:Substantive tests should increaseIn a financial statement audit, inherent risk is evaluated to help an auditor assess which of the following?Inherent risk is the susceptibility of a relevant assertion to a material misstatement, assuming there are no related controls. CANNOT be changed by the auditor, exist independently of auditWhat is detection risk?the risk that the audit procedures implemented will not detect a misstatement that exists in a relevant assertion. CAN be changed by the auditorWhat is control risk?is the risk that a material misstatement will not be detected (or prevented) on a timely basis by the entity's internal control. CANNOT be changed by the auditor, exist independently of auditCalculation for Audit Risk?Audit Risk (should be low) = Risk of Material Misstatement (assessed by auditor) X Detection Risk (controlled by auditor)What makes up Risk of Material Misstatement?Inherent Risk X Control RiskUnder which of the following circumstances should an auditor consider confirming the terms of a large complex sale?The auditor would consider confirming a large complex sale when the risk of material misstatement (RMM) is high. The risk of material misstatement includes both inherent risk and control risk. If both inherent risk and control risk are high, then RMM is high and the auditor would minimize detection risk by performing more reliable auditing procedures, such as confirmation of the terms of large complex sale.While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?Numerous unexpected errors would result in an increase in the assessment of risk. An increase in risk of material misstatement would result in a decrease in detection risk, which means the assurance provided from substantive procedures should increase. Performing testing at year-end as well as utilizing more experienced audit team members to perform those tests would be an appropriate response.Which of the following matters relating to an entity's operations would an auditor most likely consider as an inherent risk factor in planning an audit?The auditor would most likely consider derivative transactions as an inherent risk factor. Derivative transactions entered into as hedges may result in an increased assessment of inherent risk. For example, derivatives entered into as hedges may involve complex calculations and/or may be based on accounting estimates that are subject to significant measurement uncertainty.In an audit of a nonissuer's financial statements, projected misstatement is?Projected misstatement is an auditor's best estimate of misstatements in a population extrapolated from misstatements identified in an audit sampleAn auditor concludes that client management has been involved in noncompliance with a certain law and that this fact has not been properly accounted for or disclosed. The auditor should withdraw from the engagement if the?The auditor should withdraw from the engagement if the client refuses to accept the auditor's modified report. The auditor should also notify in writing those charged with governance.Which of the following statements is correct regarding the auditor's consideration of the possibility of noncompliance with laws and regulations by clients?If specific information concerning a possible act of noncompliance with laws and regulations comes to the auditor's attention, the auditor should apply additional audit procedures to determine whether an act of noncompliance with laws and regulations has in fact occurred. Professional skepticism throughout the audit is important in this context, given the extent of laws and regulations that affect the client.Which of the following characteristics most likely would heighten an auditor's concern about the risk of material misstatements in an entity's financial statements?In assessing the risk related to material misstatements in an entity's financial statements, the auditor would consider situations that threaten financial stability or profitability, since such situations might provide an incentive to fraudulently misstate the financial statements. Included as one of these characteristics is declining customer demand.What parties is the auditor responsible for telling if they find a material amount of fraud?The disclosure of fraudulent activities to the client's senior management and those charged with governanceWhen an auditor increases the assessed level of risk of material misstatement because?When an auditor increases the assessed risks of material misstatement because certain control activities were determined to be ineffective, the auditor most likely would increase the: Extent of tests of controls. Level of detection risk.
What happens when control risk increases?If control risk is high, then the audit team team would conclude that controls are not operating effectively and they will not rely the company's internal controls. If control risk is low, then the audit team would conclude that controls are operating effectively.
When the assessed level of control risk is low the auditor should?Regardless of the assessed level of control risk, the auditor should perform substantive procedures for all relevant assertions related to all significant accounts and disclosures in the financial statements.
What causes audit risk to increase?Audits that were weak or biased or audits in which auditors ignored material misstatements intentionally could increase the level of inherent risk. Transactions between related entities could also increase the level of inherent risk.
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When an auditor increases the assessed level of control risk the auditor would most likely increase the?
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