Audit Risk

Question 1

What is audit risk?

Answer 1

The risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated ## Footnote It is a function of the risks of material misstatement and detection risk.

Question 2

What are the components of audit risk?

Answer 2

Inherent risk, control risk, and detection risk ## Footnote Audit Risk = Inherent Risk × Control Risk × Detection Risk.

Question 3

What is inherent risk?

Answer 3

The susceptibility of an assertion to a material misstatement assuming no related controls ## Footnote Exists independently of the audit.

Question 4

What is control risk?

Answer 4

The risk that a material misstatement will not be prevented or detected and corrected by internal control ## Footnote Depends on the design and effectiveness of internal controls.

Question 5

What is detection risk?

Answer 5

The risk that audit procedures will not detect a material misstatement that exists ## Footnote It is the only component of audit risk that the auditor can control.

Question 6

What is the relationship between RMM and detection risk?

Answer 6

Inverse relationship ## Footnote Higher RMM means lower acceptable detection risk and vice versa.

Question 7

What is the risk of material misstatement (RMM)?

Answer 7

The risk that the financial statements are materially misstated prior to audit ## Footnote Composed of inherent risk and control risk.

Question 8

What is the auditor’s response to high RMM?

Answer 8

Perform more effective, extensive, and timely substantive procedures ## Footnote To reduce detection risk and maintain acceptable audit risk.

Question 9

What is the audit risk model?

Answer 9

Audit Risk = Inherent Risk × Control Risk × Detection Risk ## Footnote Used to plan audit procedures and assess risk.

Question 10

What is the acceptable level of detection risk if RMM is high?

Answer 10

Low ## Footnote Auditor must gather more persuasive evidence to reduce audit risk.

Question 11

Can audit risk be eliminated?

Answer 11

No ## Footnote Due to inherent limitations of internal control and audit procedures.

Question 12

What is the relationship between audit risk and materiality?

Answer 12

Inverse relationship ## Footnote Lower materiality requires lower audit risk and more audit work.

Question 13

What is the auditor’s responsibility regarding audit risk?

Answer 13

To reduce audit risk to an acceptably low level ## Footnote Enables a reasonable basis for expressing an opinion.

Question 14

What factors affect detection risk?

Answer 14

Nature, timing, and extent of audit procedures and their application ## Footnote Also affected by auditor’s judgment and professional skepticism.

Question 15

What is the purpose of assessing audit risk?

Answer 15

To design audit procedures that provide sufficient appropriate evidence ## Footnote Ensures audit opinion is based on reliable findings.

Question 16

What is the relationship between audit risk and detection risk?

Answer 16

Direct relationship ## Footnote As audit risk increases, detection risk must also increase to maintain the equation AR = IR × CR × DR.

Question 17

What is the relationship between RMM and detection risk?

Answer 17

Inverse relationship ## Footnote Higher RMM requires lower detection risk to keep audit risk acceptably low.

Question 18

Which component of audit risk is controllable by the auditor?

Answer 18

Detection risk ## Footnote It can be adjusted by changing the nature, timing, and extent of audit procedures.

Question 19

Which components of audit risk are not controllable by the auditor?

Answer 19

Inherent risk and control risk ## Footnote These are entity-level risks that exist independently of the audit.

Question 20

If inherent risk and control risk are high

Answer 20

what should the auditor do?

Question 21

If detection risk is high

Answer 21

what does it imply about RMM?

Question 22

If detection risk is low

Answer 22

what does it imply about audit procedures?

Question 23

If audit risk is set low and RMM is high

Answer 23

what must detection risk be?

Question 24

If audit risk is set high and RMM is low

Answer 24

what can detection risk be?

Question 25

What is the auditor’s response to increased control risk?

Answer 25

Reduce detection risk by increasing substantive testing ## Footnote Less reliance on internal controls.

Question 26

What is the auditor’s response to increased inherent risk?

Answer 26

Reduce detection risk by enhancing audit procedures ## Footnote More effort is needed to detect misstatements.

Question 27

What is the effect of weak internal control on audit risk?

Answer 27

Increases control risk and overall RMM ## Footnote Auditor must compensate with lower detection risk.

Question 28

What is the effect of strong internal control on audit risk?

Answer 28

Reduces control risk and RMM ## Footnote Allows auditor to accept higher detection risk.

Question 29

What is the effect of low materiality on audit risk?

Answer 29

Audit risk must also be low ## Footnote More audit work is required to detect smaller misstatements.

Question 30

What is the effect of high materiality on audit risk?

Answer 30

Audit risk can be higher ## Footnote Less audit effort is needed when only large misstatements are material.

Question 31

What is the risk that audit procedures fail to detect a material misstatement?

Answer 31

Detection risk ## Footnote It is the only component of audit risk that the auditor can directly influence.

Question 32

What is the risk that a material misstatement exists before audit?

Answer 32

Risk of material misstatement ## Footnote Composed of inherent and control risks.

Question 33

What is the risk that internal controls fail to prevent or detect misstatements?

Answer 33

Control risk ## Footnote Depends on the design and effectiveness of internal controls.

Question 34

What is the risk that an assertion is susceptible to misstatement without considering controls?

Answer 34

Inherent risk ## Footnote Based on the nature of the account or transaction.

Question 35

True or False: Detection risk can be eliminated by performing more audit procedures.

Answer 35

False ## Footnote It can only be reduced, not eliminated, due to audit limitations.

Question 36

True or False: Inherent and control risks are entity-level risks.

Answer 36

True ## Footnote They exist independently of the audit.

Question 37

True or False: The auditor can control inherent risk through planning.

Answer 37

False ## Footnote Inherent risk is not controllable by the auditor.

Question 38

True or False: Audit risk is the risk that the auditor expresses a correct opinion.

Answer 38

False ## Footnote It is the risk of expressing an inappropriate opinion when misstatements exist.

Question 39

True or False: Detection risk is inversely related to RMM.

Answer 39

True ## Footnote Higher RMM requires lower detection risk.

Question 40

True or False: Audit risk and detection risk move in opposite directions.

Answer 40

False ## Footnote They move in the same direction.

Question 41

What is a red flag for high inherent risk?

Answer 41

Complex estimates or subjective judgments ## Footnote These increase susceptibility to misstatement.

Question 42

What is a red flag for high control risk?

Answer 42

Lack of segregation of duties ## Footnote Weak controls increase the risk of undetected errors or fraud.

Question 43

What is a red flag for high detection risk?

Answer 43

Inexperienced audit staff or poor supervision ## Footnote Increases the chance of misapplying procedures.

Question 44

What is a red flag for increased audit risk?

Answer 44

Management override of controls ## Footnote Undermines the reliability of internal controls.

Question 45

What is a red flag for misstatement in revenue?

Answer 45

Unusual spikes in year-end sales ## Footnote May indicate premature revenue recognition.