A) the risk of issuing an incorrect audit opinion.

C) the overall risk of material misstatement.

D) the risk of the entity's financial failure

Client risk as defined in the text is:

B) the overall risk of material misstatement.

C) the risk that audit procedures will fail to detect material misstatements

D) the risk of the entity's financial failure.

Under Auditing Standards, which of the following would be classified as an error?

B) Misinterpretation by management of facts that existed when the financial statements were prepared

A) Misappropriation of assets for the benefit of management

C) Preparation of records by employees to cover a fraudulent scheme.

D) Intentional omission of the recording of a transaction to benefit a third party.

When assessing the risk of material misstatement, auditors evaluate the reasonableness of an entity's accounting estimates. An auditor normally would be concerned about assumptions that are:

B) consistent with prior periods

D) similar to industry guidelines

Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?

C) Management places substantial emphasis on meeting earnings projections

A) Turnover of senior accounting personnel is low.

B) Insiders recently purchased additional shares of the entity's stock.

D) The rate of change in the entity's industry is slow.

Which of the following is a factual misstatement?

B) A fixed asset being recorded at the incorrect cost

A) A management estimate that is outside the range of reasonable outcomes determined by the auditor

C) A projected misstatement resulting from errors found during sampling

D) Difference in judgment between the auditor and management.

Engagement risk can be eliminated by:

D) Engagement risk cannot be eliminated

A) establishing policies for client acceptance and continuance

The achieved (actual) level of audit risk:

C) can never be known with certainty

A) can always be accurately assessed by the auditor

B) should be greater than or equal to acceptable audit risk.

D) is the same for all audit engagements

An auditor knows that an audit client operating in an industry in which common stock is valued based on the price-earnings ratio will soon make an initial public offering. All of the following are true except:

A) materiality should be reduced

B) risk of material misstatement should increase

C) detection risk should decrease

The risk of material misstatement differs from detection risk in that it:

C) exists independently of the actions of the auditor.

A) arises from the misapplication of auditing procedures

B) may be assessed in either quantitative or qualitative terms

D) can be changed at the auditor's discretion

All of the following are inherent risk factors that are pervasive to the financial statements except:

D) supplies inventory is difficult to count

A) highly complex significant transactions

C) classes of transactions are not processed systematically

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of risk of material misstatement from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor would:

A) decrease amount of substantive testing

D) increase materiality levels.

24) An auditor learns that a client's employee in control of inventory gets divorced and is responsible for paying a large amount of child support. All of the following for the audit of inventory likely are true except:

B) the risk of misappropriation of assets increases

C) risk of material misstatement increases.

25) Which of the following audit risk components may be assessed in qualitative terms?

D) Both risk of material misstatement and detection risk.

A) Risk of material misstatement.

C) Neither risk of material misstatement nor detection risk.

When an entity moves into a significant new line of business, all of the following increase except:

C) risk of material misstatement

Which of the following procedures would not be used to obtain an understanding of the entity and its environment?

C) Verify proper valuation of inventory subject to technological obsolescence

D) Review prior year's audit documentation

Which of the following is not an important consideration in an auditor's evaluation of an entity's business risk?

D) Audit standards require the auditor to evaluate the entity's business risk in order to provide suggestions to improve the entity's profitability

A) The specific business risks an entity faces that may result in financial statement errors and fraud

B) Business risk factors that impact the ability of the entity to be profitable and survive

C) Audit standards include many entity business risk factors that identify circumstances that increase the likelihood of material misstatements

Which of the following is a source of detection risk?

A) Unstable business environment.

D) Inherent risk assessed too high

Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity's financial statements?

A) Accounts receivable confirmation requests yield significantly fewer responses than expected.

B) Audit trails of computer-generated transactions exist only for a short time.

C) The chief financial officer does not sign the management representation letter until the last day of the auditor's fieldwork.

D) Management consults with other accountants about significant accounting matters

The primary responsibility for preventing fraud in an organization lies with:

D) the organization's management.

A) the audit committee of the board of directors.

Which of the following is not a misstatement of the financial statements?

A) The entity uses different inventory accounting methods for internal and external reporting

C) The footnote for pensions is omitted

D) A clerk incorrectly based the allowance for doubtful accounts on 31% of sales as opposed to 13% of sales as determined by the controller

All of the following represent an increased opportunity for management to commit fraud except:

B) the auditor's relationship with management is strained.

A) significant related party transactions.

C) management is dominated by a single person.

D) the financial statements include highly subjective estimates.

The auditor can respond to an increased risk of fraud by doing all of the following except:

A) evaluating whether the accounting policies selected may be indicative of fraudulent financial reporting through earnings management.

B) assigning more experienced personnel to the audit.

D) taking steps to obtain more reliable evidence.

An auditor discovers a likely fraud during an audit but concludes that the overall effect of the fraud is not sufficiently material to affect the audit opinion. The auditor should probably:

A) disclose the fraud to the appropriate level of the client's management.

B) disclose the fraud to appropriate authorities external to the client.

C) discuss with the client the additional audit procedures that will be needed to identify the exact amount of the fraud.

D) modify the audit program to include tests specifically designed to identify the fraud and its impact on the financial statements

The acceptable level of detection risk is inversely related to the:

A) extent of the substantive procedures.

B) risk of misapplying auditing procedures

D) risk of failing to discover material misstatements.

As the acceptable level of detection risk decreases, an auditor may change the:

B) nature of substantive procedures from less effective to more effective procedures.

A) timing of tests of controls by performing them at an interim date rather than at year-end.

C) timing of tests of controls by performing them at several dates rather than at one time.

D) assessed level of risk of material misstatement to a higher amount.

As the acceptable level of detection risk decreases, the assurance directly provided from:

A) substantive procedures should increase.

B) substantive procedures should decrease.

C) tests of controls should increase

D) tests of controls should decrease.

The objectives of the engagement partner's communication with the audit team include:

D) emphasizing the importance of professional skepticism.

A) maintaining an adversarial atmosphere between the auditor and management.

The auditor is most likely to presume that a high risk of a fraud relating to the misappropriation of assets exists if:

C) inadequate segregation of duties places an employee in a position to perpetrate and conceal theft

A) the entity is a multinational company that does business in numerous foreign countries.

B) the entity does business with several related parties.

D) inadequate employee training results in lengthy EDP exception reports each month.

Which of the following factors most likely would heighten an auditor's concern about the risk of fraudulent financial reporting?

A) Inability to generate cash flows from operations while reporting substantial earnings growth.

B) Management's lack of interest in increasing the entity's earnings trend.

C) Large amounts of liquid assets that are easily converted into cash.

D) Inability to borrow necessary capital without granting debt covenants.

A properly planned and performed audit may fail to detect a material misstatement resulting from fraud because:

A) audit procedures that are otherwise effective may be ineffective for fraud that is concealed through collusion

B) an audit is planned and performed to provide reasonable assurance of detecting material misstatements caused by errors but not by fraud.

C) the factors considered in assessing control risk indicated an increased risk of error but only a low risk of fraud in the financial statements.

D) the auditor did not consider factors influencing audit risk for account balances that have effects pervasive to the financial statements taken as a whole.

Which of the following is correct concerning required auditor communications about fraud?

A) Fraud that involves senior management should be reported directly by the auditor to the audit committee regardless of the amount involved.

B) Fraud with a material effect on the financial statements should be reported directly by the auditor to the Securities and Exchange Commission

C) Any requirement to disclose fraud outside the entity is the responsibility of management and not that of the auditor.

D) The professional standards provide no requirements related to the communication of fraud, but the auditor should use professional judgment in determining communication responsibilities.

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Chapter 4

45 questions

Audit risk is the auditor's exposure to loss or injury of his or her reputation from events arising
in connection with financial statements audited.

Engagement risk is the auditor's exposure to loss or injury of his or her reputation from events
arising in connection with financial statements audited.

The components of the audit risk model include inherent risk, control risk, and detection risk.

Inherent risk is the susceptibility of an assertion to material misstatement, assuming no related
controls.

Professional judgment must be used when evaluating business risk.

The risk of a material misstatement includes inherent risk and sampling risk.

The combination of inherent risk and control risk is referred to as client risk.

Inherent risk includes sampling risk and detection risk.

Engagement risk is:

Client risk as defined in the text is:

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Similar Resources on Wayground

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Discover more resources for English

Chapter 4

45 questions

Audit risk is the auditor's exposure to loss or injury of his or her reputation from events arisingin connection with financial statements audited.

Engagement risk is the auditor's exposure to loss or injury of his or her reputation from eventsarising in connection with financial statements audited.

The components of the audit risk model include inherent risk, control risk, and detection risk.

Inherent risk is the susceptibility of an assertion to material misstatement, assuming no relatedcontrols.

Professional judgment must be used when evaluating business risk.

The risk of a material misstatement includes inherent risk and sampling risk.

The combination of inherent risk and control risk is referred to as client risk.

Inherent risk includes sampling risk and detection risk.

Engagement risk is:

Client risk as defined in the text is:

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Discover more resources for English

Audit risk is the auditor's exposure to loss or injury of his or her reputation from events arising
in connection with financial statements audited.

Engagement risk is the auditor's exposure to loss or injury of his or her reputation from events
arising in connection with financial statements audited.

Inherent risk is the susceptibility of an assertion to material misstatement, assuming no related
controls.