Question 1

Some risk exists that the financial statements are not fairly stated, even when the auditor's opinion is unmodified.

Accepted Answer

The existence of risks and uncertainties means that there is always a possibility that the financial statements are not fairly stated, even when the auditor's opinion is unmodified. The auditor's opinion only indicates that, in their professional judgment, the financial statements are free from material misstatements. However, there could still be errors, omissions, or fraud that have not been detected. Therefore, users of the financial statements need to exercise caution and perform their own analyses and assessments to mitigate the risk of relying on incomplete or inaccurate information.

Question 2

Inherent risk and control risk exist independent of the audit of the financial statements.

Accepted Answer

Inherent risk is the risk that exists in the nature of the client's business or industry, and control risk is the risk that a misstatement could occur and not be prevented or detected by the entity's internal controls. Both of these risks exist independent of the audit of the financial statements and are assessed by the auditor during the planning phase of the audit.

Question 3

Risk of material misstatement at the assertion level

Accepted Answer

Risk of material misstatement at the assertion level determines the nature, timing, and extent of further auditing procedures. It applies to both account balances and transactions/ events. It is separate from business risk and inherent risk, which are taken into account in assessing the risk of material misstatement. It can also be specific to certain assertions, rather than pervasive to the entire financial statements.

Question 4

________ risk represents the auditor's assessment of the susceptibility of an assertion to material misstatement, before considering the effectiveness of the client's internal controls.

Accepted Answer

Inherent risk represents the risk that exists in the absence of internal controls, meaning it is the susceptibility of an assertion to material misstatement before considering the effectiveness of the client's internal controls. Material risk pertains to the magnitude of the misstatement that potentially could occur, account balance risk relates to the risk associated with individual accounts or groups of accounts, and control risk represents the risk that a material misstatement will not be prevented or detected by internal control.

Question 5

Which of the following would not increase the risks of material misstatement at the overall financial statement level?

Accepted Answer

Effective oversight by the board of directors would not increase the risks of material misstatement at the overall financial statement level. The other options, deficiencies in management's integrity and inadequate accounting systems, have the potential to increase the risks of material misstatement.

Question 6

Assessing the risk of material misstatement is closely related to each of the following except

Accepted Answer

Assessing the risk of material misstatement is a critical consideration in financial statement audits, and is closely related to the auditor's overall audit responsibilities, materiality and audit planning, as well as the auditor's review of the key transaction cycles and associated audit objectives. Option C is incorrect as it is not related to the topic at hand.

Question 7

Risk assessment procedures include inquiries of management and others by the auditor. As part of these procedures, the auditor should talk to

Accepted Answer

As part of risk assessment procedures, the auditor should talk to internal auditors for their insights on the risks faced by the organization, board of directors to understand how the board is overseeing risk management, and individuals involved with regulatory compliance to gain an understanding of the regulatory landscape that the organization operates in. Therefore, all of the above options (A, B, and C) are the appropriate people to talk to during risk assessment procedures.

Question 8

The performance of risk assessment procedures is designed to help the auditor obtain an understanding of the entity.

Accepted Answer

Risk assessment procedures are designed to help the auditor obtain an understanding of the entity and its environment, including its internal control, in order to assess the risks of material misstatement in the financial statements.

Question 9

Risk assessment procedures include

Accepted Answer

The answer of Risk assessment procedures include
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Question 10

Audit reports issued under the PCAOB and the AICPA standards contain two important phrases that are directly related to materiality and to risk: obtain absolute assurance and free of material misstatement.

Accepted Answer

Audit reports issued under the PCAOB and AICPA standards cannot provide absolute assurance or guarantee that financial statements are completely free of material misstatement. These phrases are not used in audit reports, but instead use the phrase "reasonable assurance" and state that the financial statements are presented fairly, in all material respects.

Question 11

As management is responsible for the financial statements, failure to assess the risk of material misstatement is not detrimental to the auditor.

Accepted Answer

The statement is incorrect. It is the auditor's responsibility to assess the risk of material misstatement in the financial statements, and failure to do so can be detrimental to the auditor's reputation, liability, and credibility. Management is responsible for preparing the financial statements, but the auditor is responsible for ensuring their accuracy and reliability.

Question 12

Name some examples where the auditor accepts some level of uncertainty in performing the audit function.

Accepted Answer

The answer of Name some examples where the auditor accepts...

Question 13

For well-planned audits, it is practical for auditors to provide assurances on immaterial amounts included in the financial statements.

Accepted Answer

Auditors focus on material amounts because immaterial amounts are considered too small to influence the decisions of users of the financial statements, making it impractical to provide assurances on them.

Question 14

Auditing standards require the engagement partner to be included in discussions about the susceptibility of the client's financial statements to material misstatements.

Accepted Answer

This is a requirement of auditing standards as the engagement partner has overall responsibility for the audit and should be involved in all discussions related to potential material misstatements.

Question 15

The auditor's responsibility section in an audit report states that "…the standards require that we plan and perform the audit to obtain ________ assurance about whether the financial statements are free of material misstatement." What type of assurance is given?

Accepted Answer

The phrase "reasonable assurance" is the specific term defined in auditing standards to describe the level of assurance provided by an audit. This means that the auditor has performed their work with due care and professional skepticism to provide an opinion that the financial statements are fairly presented and free from material misstatement. However, it does not provide absolute assurance as there is always a risk that some misstatements or fraud may go undetected.

Question 16

The phrase free of material misstatement informs users that the auditor's responsibility is not limited to only material financial information.

Accepted Answer

The phrase "free of material misstatement" actually indicates that the auditor's responsibility is to ensure that the financial statements do not contain significant inaccuracies or errors, focusing specifically on material financial information.

Question 17

Significant changes in the industry may increase the risk of material misstatement at the assertion level.

Accepted Answer

The answer of Significant changes in the industry may increase...

Question 18

Audit reports contain the phrase obtain reasonable assurance, which is intended to inform users that auditors do not guarantee or ensure the fair presentation of the financial statements which the audit reports cover.

Accepted Answer

This is a standard disclaimer included in audit reports to clarify the limited scope and nature of auditing. Auditors can only provide reasonable assurance that the financial statements are free from material misstatements, but they cannot guarantee or ensure complete accuracy or fairness.

Question 19

The risk of material misstatement exists only at the overall financial statement level.

Accepted Answer

The risk of material misstatement exists at both the overall financial statement level and the individual account or balance level. It is important for auditors to assess and address the risks at both levels.

Question 20

Auditors are not allowed to make inquires of employees who are not considered management, such as marketing or sales personnel.

Accepted Answer

Auditors are allowed to make inquiries of all employees, not just management. However, the scope and nature of the inquiries may differ for different levels of employees based on their role and knowledge of the company's operations.

Quiz 9: Assessing the Risk of Material Misstatement