ASSESSING THE RISK OF MATERIAL MISSTATEMENT

Question 1

ACCEPTABLE AUDIT RISK

Answer 1

A MEASURE OF HOW WILLING THE AUDITOR IS TO ACCEPT THAT THE FINANCIAL STATEMENTS MAY BE MATERIALLY MISSTATED AFTER THE AUDIT IS COMPLETED AND AN UNMODIFIED AUDIT OPINION HAS BEEN ISSUED

Question 2

AUDIT ASSURANCE

Answer 2

A COMPLEMENT TO ACCEPTABLE AUDIT RISK; AN ACCEPTABLE AUDIT RISK OF 2 PERCENT IS THE SAME AS AUDIT ASSURANCE OF 98 PERCENT; ALSO CALLED OVERALL ASSURANCE AND LEVEL OF ASSURANCE

Question 3

AUDIT RISK MODEL

Answer 3

A FORMAL MODEL REFLECTING THE RELATIONSHIPS BETWEEN ACCEPTABLE AUDIT RISK [AAR], INHERENT RISK [IR], CONTROL RISK [CR], AND PLANNED DETECTION RISK [PDR]; PDR=AAR/[IR*CR]

Question 4

CONTROL RISK

Answer 4

A MEASURE OF THE AUDITOR’S ASSESSMENT OF THE RISK THAT A MATERIAL MISSTATEMENT COULD OCCUR IN AN ASSERTION AND NOT BE PREVENTED, OR DETECTED AND CORRECTED, ON A TIMELY BASIS BY THE CLIENT’S INTERNAL CONTROLS

Question 5

ENGAGEMENT RISK

Answer 5

THE RISK THAT THE AUDITOR OR AUDIT FIRM WILL SUFFER HARM BECAUSE OF A CLIENT RELATIONSHIP, EVEN THOUGH THE AUDIT REPORT ISSUED FOR THE CLIENT WAS CORRECT

Question 6

INHERENT RISK

Answer 6

A MEASURE OF THE AUDITOR’S ASSESSMENT OF THE SUSCEPTIBILITY OF AN ASSERTION TO MATERIAL MISSTATEMENT BEFORE CONSIDERING THE EFFECTIVENESS OF INTERNAL CONTROL

Question 7

NONROUTINE TRANSACTION

Answer 7

A TRANSACTION THAT IS UNUSUAL, EITHER DUE TO SIZE OR NATURE, AND THAT IS INFREQUENT IN OCCURRENCE

Question 8

PLANNED DETECTION RISK

Answer 8

A MEASURE OF THE RISK THAT AUDIT EVIDENCE FOR A SEGMENT WILL FAIL TO DETECT MISSTATEMENTS THAT COULD BE MATERIAL, SHOULD SUCH MISSTATEMENTS EXIST; PDR=AAR/[IR*CR]

Question 9

RISK

Answer 9

THE ACCEPTANCE BY AUDITORS THAT THERE IS SOME LEVEL OF UNCERTAINTY IN PERFORMING THE AUDIT FUNCTION

Question 10

SIGNIFICANT RISK

Answer 10

AN IDENTIFIED AND ASSESSED RISK OF MATERIAL MISSTATEMENT THAT, IN THE AUDITOR’S PROFESSIONAL JUDGEMENT, REQUIRES SPECIAL AUDIT CONSIDERATION