Audit Risk

Question 1

Define audit risk:

Answer 1

Risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated

Question 2

Audit risk is a probability and that the audit risk and materiality are interrelated by the definition of audit risk?

Answer 2

True

Question 3

Define reasonable assurance:

Answer 3

that audit risk cannot be reduced to a zero probability. High but not absolute level of confidence.

Question 4

The one overriding audit planning objective is to…?

Answer 4

limit audit risk to an appropriate low level

Question 5

The risk of material misstatement (RMM) is defined as and contains what components?

Answer 5

1) The financial statement level

2) The assertion level

Question 6

Risk of material misstatement at the financial statement level refers to risk that…

Answer 6

are perverse to the financial statements and potentially affect many assertions

Question 7

Risk of material misstatement at the assertion level consists of three component risks, what are they?

Answer 7

1) Inherent Risk
2) Control Risk
3) Detection Risk

Question 8

Define Inherent Risk:

Control Risk:

Detection Risk:

Answer 8

The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures

That a material misstatement that occurred in the first place would not be detected by internal controls

The probability that a material misstatement that was not prevented or detected and corrected by internal control was not detected by the auditors substantive audit procedures

Question 9

The more you increase detection risk or decrease detection risk (what’s in the auditors control), what happens?

Answer 9

It adjusts the amount of substantive testing the auditors will do