Pre-engagement
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Apple Case Study
| AUDIT PLANNING/RISK ASSESSMENTS 1
The degree of certainty that the practitioner has attained and wishes to convey is called: audit risk assurance materiality audit report The risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated is: analytical procedures risk. control risk. audit risk. inherent risk. The risk of a material misstatement occurring in an account, assuming an absence of internal control, is referred to as: a. Account risk c. Detection risk b. Control risk d. Inherent risk The risk that the auditor will not detect a material misstatement that exists in an assertion is: control risk. audit risk. inherent risk. detection risk. Which of the following best describes control risk? The risk that a material misstatement will occur in the accounting process. The risk that controls will not detect a material misstatement that occurs. The risk that audit procedures will fail to detect a weak control system. The risk that the prescribed control procedures will not be applied uniformly. The auditor faces a risk that the examination will not detect material misstatements in the financial statements. In regard to minimizing this risk, the auditor primarily relies on: Substantive test c. Internal control Test of controls d. Statistical analysis Which of the following is not among the components of audit risk? a. Inherent risk c. Substantive risk b. Detection risk d. Control risk The audit risk against which the auditor and those who rely on his/her opinion require reasonable protection is a combination of three separate risks at the account-balance or class-of-transactions level. The first risk is inherent risk. The second risk is that material misstatements will not be prevented or detected by internal control. The third risk is that The auditor will reject a correct account balance as incorrect Material misstatements that occur will not be detected by the audit The auditor will apply an inappropriate audit procedure The auditor will apply an inappropriate measure of audit materiality. Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit function. An effective auditor will Take any means available to reduce the risk to the lowest possible level. Set the risk level between 5% and 10%. Perform the audit procedures first and quantitatively set the risk level before forming an opinion and writing the report. Recognize that risk exists and deal with them in an appropriate manner. Which of the following audit risk components may be assessed in quantitative and non-quantitative terms?
Inherent risk and control risk differ from detection risk in that they Arise from the misapplication of auditing procedures. May be assessed in either quantitative or nonquantitative terms. Exist independently of the financial statement audit. Can be changed at the auditor’s discretion. Which of the following statements is correct? Detection risk is a function of the efficiency of an auditing procedure and its application. Detection cannot be changed at the auditor’s discretion. Detection risk arises partly because of uncertainties that exist when the auditor does not examine 100 percent of the population. Detection risk exists independently of the audit of the financial statements. Which of the following is an incorrect statement? Detection risk can be changed at the auditor’s discretion. If individual audit risk remains the same, detection risk bears an inverse relationship to inherent & control risks. The greater the inherent & control risks the auditor believes exists, the more detection risk that can be accepted. The auditor might make separate or combined assessments of inherent risk and control risk. As the acceptable level of detection risk decreases, an auditor may Increase substantive test Decrease substantive test Increase tests of controls Decrease tests of controls The acceptable level of detection risk is inversely related to the Assurance provided by substantive tests. Risk of misapplying auditing procedures. Preliminary judgment about materiality levels Risk of failing to discover material misstatements As the acceptable level of detection risk decreases, the assurance directly provided from Substantive tests should increase. Substantive tests should decrease. Tests of controls should increase. Tests of controls should decrease. Relationship between control risk and detection risk is ordinarily
Failure to detect material peso errors in the financial statements is a risk which the auditor primarily mitigates by performing substantive tests performing tests of controls understanding internal control structure obtaining a client representation letter As the acceptable level of detection risk decreases, an auditor may Reduce substantive testing by relying on the assessments of inherent risk and control risk. Postpone the planned timing of substantive tests from interim dates to the year-end. Eliminate the assessed level of inherent risk from consideration as a planning factor. Lower the assessed level of control risk from the maximum level to below the maximum. On the basis of the 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
An auditor may compensate for a weakness in the internal control by increasing the Level of detection risk. Preliminary judgment about audit risk. Extent of tests of controls (compliance tests). Extent of test of details What is the magnitude of audit risk if inherent risk is .50, control risk .40, and detection risk .10? a. .20 b. .10 c. .04 d. .02 Which of the following types of risk is significantly affected by the nature, amount and timing of substantive auditing procedures?
As the acceptable level of detection risk decreases, an auditor do one or more of the following except change The timing of substantive tests by performing them at year-end. The nature of substantive tests from a less effective to a more effective procedure The timing of tests of controls by performing them at several dates rather than at one time The extent of substantive tests such as using larger sample size As the acceptable level of detection risk decreases the auditor may Perform tests of control at yearend rather than at interim Increase the level of inherent and control risks Design more effective substantive procedures Use larger sample size for tests of controls As the acceptable level of detection risk decreases, an auditor may change the Timing of substantive tests by performing them at an interim date rather than at year-end Nature of substantive tests from a less effective to a more effective procedure Timing of tests of controls by performing them at several dates rather than at one time Assessed level of inherent risk to a higher amount Some account balances, such as those for pensions or leases, are the results of complex calculations. The susceptibility to material misstatements in these types of accounts is defined as
Inherent risk is defined as the susceptibility of an account balance or class of transactions to error that could be material assuming that there were no related internal controls. Of the following conditions which one does not increase inherent risk? The client has entered numerous related party transactions during the year under audit Internal control over shipping, billing, and recording of sales revenue is weak The client has lost a major customer accounting for approximately 30% of annual revenue The board of directors approved a substantial bonus for the president and chief executive office and also approved an attractive stock option plan for themselves. When discussing Inherent Risk (IR) and the Audit Risk Model, which one of the ff. statements is true? IR is directly related to detection risk. IR is inversely related to evidence. IR is the susceptibility of the financial statements to material error after considering the entity’s internal control. IR can be changed at the auditor’s discretion. Which of the following conditions supports an increase in detection risk? Internal control over cash receipts is excellent Application of analytical procedures reveals a significant increase in sales revenue in December, the last month of the fiscal year Internal control over shipping, billing, and recording of sales revenue is weak Study of the business reveals that the client recently acquired a new company in an unrelated industry. Download 114.48 Kb. Share with your friends:
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