Chapter 6: Audit Risk

1. 1. Which of the following are NOT the component of audit risk?

• Business Risk

• Inherent Risk

• Detection Risk

• Control Risk

Who is responsible for the prevention and detection of fraud?

• Internal Auditor

• Those Charged With Governance

• External Auditor

• All of them

Answer explanation

The external auditor is responsible for obtaining reasonable assurance that the financial statements are free from material misstatement whether caused by fraud or error.

The internal audit function may assist management and those charged with governance in its monitoring and reviewing role but is not ultimately responsible.

Which of the following is an appropriate response to the risks of material misstatement at the assertion level?

• Increase supervision of audit

• Increase sample size

• Change the nature of audit procedure

• Maintain professional scepticism

The auditor of A Co wishes to reduce audit risk.

Which of the following actions could the auditor take to achieve this?

(1) Increase sample sizes;

(2) Reduce control risk;

(3) Assign more experienced staff to the engagement team

• 1 only

• 2 only

• 1 & 3

• 2 & 3

Answer explanation

The auditor cannot change control risk or inherent risk.

The auditor can reduce audit risk by reducing detection risk by:

1)Increasing sample sizes

2) assigning more experienced staff to the

When determining whether the preconditions for an audit are present the auditor obtains management's agreement that it acknowledges and understands its responsibilities.

Which of the following is not included in the agreement obtained by the auditor?

• Prepare FS using acceptable framework

• Prevent and detect fraud

• Provide auditor to access of accounting records

Answer explanation

Although the directors are responsible for the prevention and detection of fraud this is not one of the matters included in the agreement obtained by the auditors to establish that the preconditions of an audit exist in accordance with ISA 210 Agreeing the terms of audit engagements.

Which of the following must be included in an audit engagement letter?

• Arrangement on work of expert

• Scope of audit

• Responsibilities of management and auditors

• Objective of audit

Answer explanation

Arrangement on work of expert: can be included but not a requirement

FC owns 4 restaurants & is subject to national regulation concerning hygiene in food preparation process. Non-compliance can result in closure of the restaurant.

As FC's external auditor, what is your responsibility on FC compliance with regulations?

• Prevent and detect non-compliance

• Perform specific audit procedure to identify possible non-compliance

• Obtain sufficient appropriate evidence on the compliance

• Nothing

Answer explanation

Although the food hygiene regulations do not have a direct effect on the determination of material amounts in the financial statements, the external auditor must undertake audit procedures to help identify non-compliance, to the extent that such non-compliance may have a material effect on the financial statements.

During the planning stages of the final audit, the auditor believes that the probability of giving an inappropriate audit opinion is too high.

How should the auditor amend the audit plan to resolve this issue?

• Increase materiality level

• Decrease inherent risk

• Decrease detection risk

Answer explanation

Increasing the materiality level would increase the risk of giving an inappropriate audit opinion further.

Inherent risk is not within the auditor's control.

Which of the following is the procedure that auditor should perform before accepting new client (client acceptance procedure)

• Assess the risk level

• Communicate with the current auditor

• Determine whether the client wants to prepare the financial statement using acceptable framework

• All of the above

Auditor should ensure the client meet the following _______ before accepting the work as auditor.

1) financial reporting framework for the preparation of the financial statements is acceptable 

2) management acknowledge responsibility to prepare FS

2) management acknowledge responsibility to provide access to all records/info

• Client acceptance procedure

• Risk Assessment

• Precondition of audit

• Responsibilities