Question 1

An example of where the auditor will accept very low risk (low acceptable audit risk) is for an audit client having an initial public offering.

Accepted Answer

In an initial public offering (IPO), the auditor will accept a very low risk because the financial statements will be scrutinized by regulators and investors, necessitating high accuracy and reliability.

Question 2

The audit committee should determine the risk the CPA firm is willing to take that the financial statements are misstated after the audit is completed.

Accepted Answer

The audit committee is responsible for overseeing the audit process, but it is the CPA firm that determines the level of risk it is willing to accept regarding the possibility of a misstatement in the financial statements, not the audit committee.

Question 3

Using your knowledge of the relationships among acceptable audit risk, inherent risk, control risk, planned detection risk, performance materiality, and planned evidence, state the effect on planned evidence (increase or decrease) of changing each of the following factors, while the other factors remain unchanged.
1. an increase in acceptable audit risk ________
2. an increase in inherent risk ________
3. a decrease in control risk ________
4. an increase in planned detection risk ________
5. an increase in performance materiality ________

Accepted Answer

The answer of Using your knowledge of the relationships among...

Question 4

After assessing internal controls are being effective in the sales and collection cycle, the auditor can assume that internal controls will be effective at each of the client's other transaction cycles.

Accepted Answer

The effectiveness of internal controls in one cycle does not automatically translate to effectiveness in other cycles. Each cycle involves different types of transactions and risks, requiring separate evaluation and assessment of internal controls.

Question 5

Audit assurance is the complement of planned detection risk, that is, one minus planned detection risk.

Accepted Answer

The answer of Audit assurance is the complement of planned...

Question 6

Inherent risk and control risk are directly related.

Accepted Answer

Inherent risk is the susceptibility of an assertion about a transaction or balance to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls. Control risk, on the other hand, is the risk that a misstatement that could occur in an assertion about a transaction or balance and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control. These risks are components of audit risk but are not directly related; they are independent factors that auditors assess separately.

Question 7

If an auditor believes the chance of financial failure is high and there is a corresponding increase in business risk for the auditor, acceptable audit risk would likely
A) be reduced.
B) be increased.
C) remain the same.
D) be calculated using a computerized statistical package.

Accepted Answer

When an auditor believes that the chance of financial failure is high, there is an increase in business risk for the auditor as well. In order to mitigate this risk, the acceptable audit risk should be reduced. This means that the auditor will need to conduct a more thorough and extensive audit to ensure that any potential errors or irregularities are detected and addressed.

Question 8

As control risk increases, the amount of substantive evidence the auditor plans to accumulate should increase.

Accepted Answer

As control risk increases, the auditor cannot rely on the controls in place to reduce the risk of material misstatements. Therefore, the auditor needs to increase the amount of substantive evidence gathered to obtain the necessary level of assurance.

Question 9

For a private company client, auditors are required to test any internal controls they believe have not been operating effectively during the period under audit.

Accepted Answer

Auditors may assess the operating effectiveness of a private company's internal controls if they choose to or if it's necessary for their audit approach, but they are not required to test all internal controls they believe have not been operating effectively. Their primary objective is to express an opinion on the financial statements, and testing of internal controls, while it may be part of the audit, is not a requirement unless the audit is being conducted under standards that specifically require such testing (e.g., an audit in accordance with PCAOB standards for public companies). For private companies, the focus is typically on substantive procedures to gather evidence about the amounts and disclosures in the financial statements.

Question 10

A planned detection risk (PDR) of .05 means the auditor plans to accumulate audit evidence until the risk of misstatement exceeding performance materiality is reduced to 5 percent.

Accepted Answer

A planned detection risk (PDR) of .05 indicates the auditor's intention to gather sufficient audit evidence so that the likelihood of not detecting a material misstatement in the financial statements is limited to 5 percent, thus aiming to reduce the risk of overlooking significant errors or fraud to a very low level.

Question 11

The auditor assesses risks at the overall financial statement level but not at the audit objective level for the acquisition and payment cycle.

Accepted Answer

The auditor assesses risks at both the overall financial statement level and the audit objective level for the acquisition and payment cycle. Assessing risks at the audit objective level helps the auditor design appropriate audit procedures to address identified risks.

Question 12

If acceptable audit risk is low, and inherent risk and control risk are both low, then planned detection risk should be high.

Accepted Answer

According to the audit risk model, the acceptable audit risk and planned detection risk are inversely related, meaning when one is low, the other should be high. Therefore, if the acceptable audit risk is low and inherent risk and control risk are both low, planned detection risk should be high to ensure an acceptable level of audit risk.

Question 13

Describe the audit risk model and each of its components.

Accepted Answer

The answer of Describe the audit risk model and each...

Question 14

Why do auditors use the audit risk model when planning an audit?

Accepted Answer

The answer of Why do auditors use the audit risk...

Question 15

A high detection risk equates to a low amount of audit evidence needed.

Accepted Answer

A high detection risk means there is a high likelihood that material misstatements will not be detected by the auditor's procedures. This means that more audit evidence is needed to reduce the detection risk and increase the reliability of the audit opinion.

Question 16

The audit risk model that must be used for planning audit procedures and evaluating audit results is:
  = AAR.

Accepted Answer

The answer of The audit risk model that must be...

Question 17

There is a direct relationship between acceptable audit risk and planned detection risk.

Accepted Answer

Acceptable audit risk and planned detection risk are inversely related, meaning that as acceptable audit risk decreases, planned detection risk should increase.

Question 18

If the audit assurance rate is 95%, then the level of acceptable audit risk is 5%.

Accepted Answer

The audit assurance rate is the complement of the acceptable audit risk. Therefore, if the audit assurance rate is 95%, the level of acceptable audit risk is 5%.

Question 19

Acceptable audit risk and the amount of substantive evidence required are inversely related.

Accepted Answer

Acceptable audit risk is the level of risk that the auditor is willing to accept that the financial statements may contain a material misstatement. When acceptable audit risk is lower, it means that the auditor is less willing to accept the risk, and therefore, requires more substantive evidence to reduce the risk of material misstatement. Conversely, when acceptable audit risk is higher, the auditor is willing to accept a higher level of risk, and therefore, may require less substantive evidence.

Question 20

Auditors begin their assessments of inherent risk during audit planning. Which of the following would not help in assessing inherent risk during the planning phase?
A) obtaining client's agreement on the engagement letter
B) obtaining knowledge about the client's business and industry
C) touring the client's plant and offices
D) identifying related parties

Accepted Answer

The answer of Auditors begin their assessments of inherent risk...

Quiz 9: Assessing the Risk of Material Misstatement