MODULE 5: AUDIT PLANNING

Given that an audit in accordance with generally accepted auditing standards is influenced by the possibility of material errors and fraud, the auditor should conduct the audit with an attitude of

• Professional responsiveness

• Conservative advocacy

• Objective judgment

• Professional skepticism

With respect to errors and fraud, which of the following should be a part of an auditor‘s planning in an audit engagement?

• Planning to search for error or fraud that would have a material or immaterial effect on the financial statements

• Planning to discover errors or fraud that are either material or immaterial

• Planning to discover errors or fraud that are material

• Planning to consider factors affecting the risk of material misstatements both at the financial statement and the account balance level

The risk that the auditor may unknowingly fail to appropriately modify the unqualified opinion on financial statements that are materially misstated is referred to as

• Audit risk

• Detection risk

• Information risk

• Business risk

The risk the financial statements are likely to be misstated materially without regard to the effectiveness of internal control is which type of risk?

• Inherent risk

• Audit risk

• Client risk

• Control risk

The type of transactions that ordinarily have a high inherent risk because they involve management judgment or assumptions are referred to as

• Estimation transactions

• Nonroutine transactions

• Routine transactions

• Related-party transactions

Inherent risk is defined as the susceptibility of an account balance or class of transactions to error that could be material assuming that there were no related internal controls. Of the following conditions, which one does not increase inherent risk?

• The client has entered into numerous related party transactions during the year under audit.

• Internal control over shipping, billing, and recording of sales revenue is weak

• The client has lost a major customer accounting for approximately 30% of annual revenue

• The board of directors approved a substantial bonus for the president and chief executive officer, and also approved an attractive stock option plan for themselves

Which of the following descriptions best describes inherent risk?

• Auditors fail to discover a material misstatement in the course of their audit and do not modify their audit opinion.

• A company‘s internal control fails to identify a material misstatement on a timely fashion

• Auditing procedures fail to find a material misstatement

• The possibility that a material misstatement will occur in any given account before considering internal control

The risk that a material misstatement in an assertion will not be prevented or detected on a timely basis by internal control is

• Detection risk

• Control risk

• Inherent risk

• Audit risk

The risk that the audit will fail to uncover a material misstatement is eliminated

• If a client has a strong internal controls

• If a client follows generally accepted accounting principles (GAAP)

• When the auditor has complied with the generally accepted auditing standards (GAAS)

• Under no circumstances

Audit risk components consist of inherent, control and detection risks. Which of them is(are) the dependent variable(s)?

• Inherent risk

• Control risk

• Detection risk

• Inherent and control risks