Question 1

What is the difference between audit risk and engagement risk?

Accepted Answer

The answer of What is the difference between audit risk...

Question 2

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

Accepted Answer

According to professional standards, fraud involving senior management should be reported directly by the auditor to the audit committee regardless of the amount involved. The auditor should also communicate fraud with a material effect on the financial statements to senior management and the audit committee. However, it is not the responsibility of the auditor to disclose fraud outside the entity. The professional standards provide guidance on required auditor communications about fraud.

Question 3

You are the senior on an audit of Two Be Gone, a large public company. The company recently completed an acquisition of its fifth largest competitor. What risks might this present? How will you, the auditor, respond to these risks (i.e., what actions should you take)?

Accepted Answer

The answer of You are the senior on an audit...

Question 4

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

Accepted Answer

The objectives of the engagement partner's communication with the audit team include emphasizing the importance of professional skepticism. This is because professional skepticism is critical to the performance of an audit. It ensures that the audit team maintains an objective and critical perspective on the information provided by management, which helps to mitigate the risk of material misstatement in the financial statements. Therefore, the engagement partner's communication should aim to emphasize the importance of professional skepticism to the audit team. The other options listed - maintaining an adversarial atmosphere between the auditor and management, complying with SEC rules, and complying with FASB rules - are not primary objectives of the engagement partner's communication with the audit team.

Question 5

Stacey, the partner in charge of the audit of RIF Enterprises, sets the planned level of audit risk for the audit of accounts payable at 0.06. The risk of material misstatement is assessed at 0.65. What is the detection risk for this audit?

Accepted Answer

The answer of Stacey, the partner in charge of the...

Question 6

During the course of the audit of FF Financial, you find that some accounting entries have been altered. You believe this may be the result of management fraud and you have determined that the effect of this could be material to the financial statements. What steps should you take in response to the accounting entries and your concern about management fraud?

Accepted Answer

The answer of During the course of the audit of...

Question 7

You are teaching a class of new hires at your international accounting firm. Explain the audit risk model using a mathematical formula.
AR = RMM × DR
AR = Audit risk
RMM = Risk of material misstatement
DR = Detection risk

Accepted Answer

The answer of You are teaching a class of new...

Question 8

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

Accepted Answer

Inability to generate cash flows from operations while reporting substantial earnings growth can indicate that the reported earnings may be fraudulent and not based on actual business operations. This discrepancy could suggest that management is purposely manipulating financial statements to deceive investors and analysts.

Question 9

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

Accepted Answer

Fraudulent activity may be intentionally concealed by perpetrators, particularly through collusion. Audit procedures that can be generally effective for detecting errors may be insufficient for detecting fraud, particularly when it is being intentionally concealed. Therefore, even a well-planned and executed audit may fail to detect material misstatements caused by fraud due to the nature of the fraud and its concealment.

Question 10

DATRIX, Inc., a Fortune 500 company, has been experiencing poor performance. Industry analysts have been issuing negative reports and the company's stock price has been steadily declining. As an auditor, what would concern you about the audit engagement of DATRIX, Inc.

Accepted Answer

The answer of DATRIX, Inc., a Fortune 500 company, has...

Question 11

Your classmate asserts, "Accountants shouldn't need to take business courses besides accounting, because they are only interested in the financial statements of a company." Defend or refute this statement.

Accepted Answer

The answer of Your classmate asserts, "Accountants shouldn't need to...

Question 12

Stacey, the partner in charge of the audit of GHER Corporation, calculates that detection risk to be 5.7% for the audit of accounts payable. GHER Corporation and RIF Enterprises are in the same industry, close to the same size, and have similar balances in accounts payable. What do the different detection risks tell you about the planned audit evidence that will be gathered for the GHER Corporation audit?

Accepted Answer

The answer of Stacey, the partner in charge of the...

Question 13

Using the Audit Risk Model, what are the risks involved in the model and what relationship does each risk in the model have with planned audit evidence (Inverse or Direct)?

Accepted Answer

The answer of Using the Audit Risk Model, what are...

Question 14

Assume that you are the new audit senior on the LV Drug Corporation (LVD)engagement. LVD is a pharmaceutical company that has three successful drugs and a number of drugs in progress in its research and development pipeline. You are considering your audit plan and it is important to identify the inherent risks that LVD has and how they relate to the planning process.
Required:
For each of the following factors, indicate whether it will tend to increase, decrease, or have no effect on inherent risk, and the reasoning for your answer.
a. Dr. Jones is the major shareholder of LVD and its CEO.
b. Your firm has audited LVD for the last four years.
c. There has been high turnover of key accounting personnel during the last two years.
d. The internal audit function reports to the audit committee.
e. LVD has been the subject of lawsuits by users of Framadon who claim that the drug affects their liver functions. LVD is confident that there are no such side effects from the use of Framadon.

Accepted Answer

The answer of Assume that you are the new audit...

Question 15

Using the audit risk model, identify the relationship between the following elements. For each of the items below, highlight whether the two elements have an inverse relationship, a direct relationship, or no relationship. When considering each item, assume that the other components of the risk model remain constant.

Accepted Answer

The answer of Using the audit risk model, identify the...

Question 16

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

Accepted Answer

Inadequate segregation of duties can create an opportunity for an employee to steal and conceal assets without detection. This increases the risk of fraud relating to the misappropriation of assets. The other options are not necessarily indicators of a high risk of fraud relating to misappropriation of assets.

Question 17

In one sentence each, define misstatements arising from fraudulent financial reporting and misstatements arising from misappropriation of assets.

Accepted Answer

The answer of In one sentence each, define misstatements arising...

Quiz 4: Risk Assessment