Question 1

Inherent risk is often high for an account such as:

Accepted Answer

Inventory is often subject to risk factors such as obsolescence, theft, and inaccurate valuation, making inherent risk higher. Land typically has lower inherent risk as its value is more stable and predictable. Cash and notes payable also have lower inherent risk as they are more easily quantifiable and less subject to uncertainty.

Question 2

To what extent do auditors typically rely on internal controls of their public company clients?

Accepted Answer

Auditors typically rely extensively on the internal controls of their public company clients. This is because internal controls provide an important basis for the auditor to assess the risk of material misstatement in the financial statements. The auditor's reliance on internal controls can also determine the nature, timing, and extent of substantive audit procedures to be performed.

Question 3

Auditors typically rely on internal controls of their private company clients:

Accepted Answer

Auditors typically rely on the internal controls of their private company clients if they are determined to be effective. This is because effective internal controls reduce the risk of material misstatement in the financial statements, which is the ultimate goal of the audit. Therefore, auditors must assess the effectiveness of internal controls as part of their audit procedures.

Question 4

Inherent risk is ________ related to detection risk and ________ related to the amount of audit evidence.

Accepted Answer

Inherent risk is inherent in the client's operations and is related inversely to detection risk, as the higher the inherent risk, the less likely it is for auditors to detect errors or fraud. Inherent risk is directly related to the amount of audit evidence required, as higher inherent risk requires a greater amount of evidence to be collected. Therefore, D is the correct choice.

Question 5

Which of the following statements is not true?

Accepted Answer

Inherent risk is directly related to the amount of audit evidence required because the higher the inherent risk, the more evidence an auditor needs to gather to be assured that the financial statements are free of material misstatement. Detection risk, on the other hand, is inversely related to the amount of audit evidence required; as detection risk decreases, an auditor needs to gather more evidence. Therefore, statement A is not true as it incorrectly states the relationship between inherent risk, detection risk, and the amount of audit evidence required.

Question 6

Planned detection risk
I. determines the amount of substantive evidence the auditor plans to accumulate.
II. is dependent on inherent risk and control risk.

Accepted Answer

The answer of Planned detection risk
I. determines the amount of...

Question 7

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

Accepted Answer

The risk of material misstatement is controllable by the client because it arises from factors within the client's control, such as the effectiveness of the client's internal controls.

Question 8

Acceptable audit risk is ordinarily set by the auditor during planning and:

Accepted Answer

Acceptable audit risk is typically determined by the auditor during the planning phase of an audit and is held constant for each major cycle and account. This approach ensures consistency in the level of risk the auditor is willing to accept across different areas of the audit.

Question 9

Tolerable misstatement does not affect audit risk, inherent risk, control risk, or planned detection risk yet the combination of the tolerable misstatement and the four risks will determine the amount of planned audit evidence.

Accepted Answer

Tolerable misstatement is a benchmark used by auditors to determine the acceptable amount of error in financial statements. It does not impact audit risk, inherent risk, control risk, or planned detection risk directly, but is used in conjunction with these factors to determine the amount of planned audit evidence needed.

Question 10

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 11

Auditors frequently refer to the terms audit assurance, overall assurance, and level of assurance to refer to ________.

Accepted Answer

The terms audit assurance, overall assurance, and level of assurance refer to the acceptable audit risk that the auditor is willing to accept. Acceptable audit risk is the risk that the auditor is willing to accept that the financial statements may be materially misstated after conducting an audit. The auditor's overall objective is to obtain reasonable assurance that the financial statements are free of material misstatement. Therefore, the acceptable audit risk is the inverse of the level of assurance desired by the auditor.

Question 12

If planned detection risk is reduced, the amount of evidence the auditor accumulates will:

Accepted Answer

If planned detection risk is reduced, the auditor will need to accumulate more evidence to provide a higher level of assurance that the financial statements are free from material misstatements. When detection risk is reduced, the auditor is willing to accept a lower risk of failing to detect a material misstatement, which means more evidence is required to achieve this. Therefore, the amount of evidence accumulated will increase.

Question 13

As the risk of material misstatement increases, detection risk should:

Accepted Answer

As the risk of material misstatement increases, detection risk should decrease. This is because detection risk is inversely related to the risk of material misstatement. When the risk of material misstatement is high, auditors need to perform more substantive procedures and have a low level of detection risk in order to detect any material misstatements that may exist.

Question 14

The measurement of the auditor's assessment of the likelihood that there are material misstatements due to error or fraud in a segment before considering the effectiveness of internal controls is defined as:

Accepted Answer

Inherent risk is the risk that there are material misstatements due to error or fraud in a segment before considering the effectiveness of internal controls. The auditor's assessment of inherent risk helps to determine the nature, timing, and extent of audit procedures. Audit risk is the risk that the auditor expresses an inappropriate audit opinion. Sampling risk is the risk that the conclusions drawn from a sample are not representative of the entire population. Detection risk is the risk that the auditor fails to identify material misstatements in the financial statements.

Question 15

Inherent risk and control risk:

Accepted Answer

The answer of Inherent risk and control risk:
...

Question 16

The risk that audit evidence for a segment will fail to detect misstatements exceeding tolerable misstatement is:

Accepted Answer

Planned detection risk represents the risk that audit evidence for a segment will fail to detect material misstatements, which exceed a tolerable amount. In other words, it is the risk that auditors won't be able to find material misstatements during their audit procedures. The other risks listed (audit risk, control risk, and inherent risk) are not directly related to the risk of failing to detect misstatements during the audit.

Question 17

Auditors may assess inherent risk and control risk:

Accepted Answer

The answer of Auditors may assess inherent risk and control...

Question 18

The risk of material misstatement refers to:

Accepted Answer

The risk of material misstatement is the combination of inherent risk and control risk. Inherent risk is the susceptibility of a financial statement assertion to a material misstatement, disregarding any internal control activities. Control risk is the risk that a material misstatement in a financial statement assertion will not be prevented, or detected and corrected on a timely basis, by the entity's internal control. Therefore, the risk of material misstatement considers both inherent and control risks. Audit risk, on the other hand, is the risk that the auditor issues an inappropriate opinion on the financial statements, and is not included in the risk of material misstatement.

Question 19

Match nine of the terms (a-i) with the definitions provided below (1-9):
a. Business risk
b. Preliminary judgment about materiality
c. Inherent risk
d. Planned detection risk
e. Audit assurance
f. Acceptable audit risk
g. Tolerable misstatement
h. Control risk
i. Materiality
________ 1. A measure of the risk that audit evidence for a segment will fail to detect misstatements exceeding a tolerable amount, should such misstatements exist.
________ 2. The risk that the auditor or audit firm will suffer harm because of a client relationship, even though the audit report rendered for the client was correct.
________ 3. A measure of the auditor's assessment of the likelihood that misstatements exceeding a tolerable amount in a segment will not be prevented or detected by the client's internal controls.
________ 4. A measure of how much risk the auditor is willing to take that the financial statements may be materially misstated after the audit is completed and an unqualified audit opinion has been issued.
________ 5. The materiality allocated to any given account balance.
________ 6. The maximum amount by which the auditor believes that the statements could be misstated and still not affect the decisions of reasonable users.
________ 7. This term is synonymous with acceptable audit risk.
________ 8. The magnitude of an omission or misstatement of accounting information that makes it probable that the judgment of a reasonable person would have been changed.
________ 9. A measure of the auditor's assessment of the likelihood that there are material misstatements before considering the effectiveness of internal control.

Accepted Answer

The answer of Match nine of the terms (a-i) with...

Question 20

In a financial statement audit, inherent risk is evaluated to help an auditor asses which of the following?

Accepted Answer

Inherent risk refers to the susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls. It helps the auditor assess the level of risk and determine the appropriate audit procedures to implement. Option A refers to the internal audit department's objectivity, which is not specifically related to inherent risk. Option B refers to control risk, which is different from inherent risk. Option C refers to detection risk, which is also different from inherent risk.

Quiz 9: Materiality and Risk