Audit Risk Practice

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Audit care and attention should be greater where business and inherent risks are judged to be lower.

False

*inherent risk is taken in before considering internal control.

Detection risk occurs when internal control activities fail to detect material misstatements.

False

*Detection Risk is the risk the CPA will not detect material misstatement on the audit.

The audit risk model assumes that elements of audit risk are independent and therefore multiplicative.

True

An auditor assesses the risk of material misstatement because it


A. Is relevant to the auditor's understanding of the control environment.

B. Provides assurance that the auditor's overall materiality levels are appropriate.

C. Indicates to the auditor where inherent risk may be the greatest.

D. Affects the level of detection risk that the auditor may accept.

D.

When fraud risk is significant, and management cooperation is unsatisfactory, the auditors will most likely


A. Perform extended audit procedures.

B. Consult with fraud examiners.

C. Report directly to the Securities and Exchange Commission within one day.

D. Withdraw from the engagement.

D.

The probability that an audit team will give an inappropriate opinion on financial statements best describes


A. Audit risk.

B. Inherent risk.

C. Control risk.

D. Detection risk.

A.

Inherent risk is the


A. Probability that some accounts are more susceptible to misstatement than others.

B. Probability that the client's internal control policies and procedures will fail to detect material misstatements.

C. Probability that material misstatements have occurred in transactions entering the accounting system used to develop financial statements.

D. Probability that the auditor may not detect material misstatements in the financial statements.

C.

If control risk increases and all other risks in the audit risk model stay constant except the one referred to below, which of the following statements is correct?


A. Detection risk will decrease.

B. Inherent risk will increase.

C. Audit risk will decrease.

D. Detection risk will increase.

A.

An audit team uses the assessed risk of material misstatement to


A. Evaluate the effectiveness of the entity's internal control policies and activities.

B. Identify transactions and account balances where inherent risk is at the maximum.

C. Indicate whether materiality thresholds for planning and evaluation purposes are sufficiently high.

D. Determine the acceptable level of detection risk for financial statement assertions.

D.

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


A. Arises from the misapplication of audit procedures.

B. May be assessed in either quantitative or nonquantitative terms.

C. Exists independently of the financial statement audit.

D. Can be changed at the auditor's discretion.

C.

The risk that an auditor's procedures will lead to the conclusion that a material misstatement does not exist in an account balance when, in fact, such misstatement actually exists is


A. Audit risk.

B. Inherent risk.

C. Control risk.

D. Detection risk.

D.

Based on audit evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk 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 substantive testing.

B. Decrease detection risk.

C. Increase inherent risk.

D. Increase materiality levels

B.

The acceptable level of detection risk is inversely related to the


A. Assurance provided by substantive tests.

B. Risk of misapplying audit procedures.

C. Preliminary judgment about materiality levels.

D. Risk of failing to discover material misstatements.

A.

When determining the inherent risk related to an account balance, an auditor theoretically does not explicitly consider the


A. Liquidity of the account.

B. Degree of management estimation involved in determining the proper account balance.

C. Related internal control policies and procedures.

D. Complexity of calculations involved.

C.

Generally accepted auditing standards state that analytical procedures


A. Should be applied in the planning and final review stages of the audit and as a substantive test during the audit.

B. Should be applied in the planning and final review stages of the audit and can be used as a substantive test during the audit.

C. Should be applied in the planning stage and can be applied as a substantive test in the final review stage.

D. Should be applied in the final review stage and can be applied as a substantive test in the planning stage.

B.

Assume that application of analytical procedures revealed significant unexplained differences between recorded amounts and the expectations (estimates) developed by the auditor. If management is unable to provide an acceptable explanation, the auditor should


A. Consider the matter a scope limitation.

B. Perform additional audit procedures to investigate the matter further.

C. Intensify the audit with the expectation of detecting management fraud.

D. Withdraw from the engagement.

B.

An auditor who increases the planned assessed level of control risk because certain control activities were determined to be ineffective would most likely increase the


A. Extent of substantive tests of details.

B. Level of inherent risk.

C. Extent of tests of controls.

D. Level of detection risk.

A.

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