CH 2 - Planning and risk assesment

Question 1

What term refers to the amount of materiality allocated to individual audit areas?

Answer 1

tolerable misstatement

Question 2

What is the audit plan?

Answer 2

Written record of the nature, extent, and timing of planned audit procedures that is required in every audit engagement

Question 3

Define inherent risk

Answer 3

Risk of material misstatment before considering any related client controls`

Question 4

In an planning stage of an audit, the NET of planning is directly relate to what?

Answer 4

The size and complexity of the client

Question 5

What are the factors that make up the risk of material misstatement?

Answer 5

Inherent risk x Control risk

Question 6

Define audit risk

Answer 6

Risk of giving the wrong opinion on the financial statements at the conclusion of the audit

Question 7

Under clarified stds: What is materiality in the planning stage of the audit referred to?

Answer 7

Performance materiality

Question 8

With regard to materiality, an auditor considers materiality for planning purposes in terms of what?`

Answer 8

The smallest aggregate (total dollar) level of misstatements that could be material to any one of the financial statements`

Question 9

What is the difference between risk of material misstatement at the financial level and risk of material misstatement at the assertion level?

Answer 9

RMM at the FS level refers to risks that are pervasive to the FS and that potentially affect many assertions

Question 10

What would cause an increase in audit risk

Answer 10

Decrease in

1. Possibility of material misstatement
2. Inherent risk
3. Detection risk

Question 11

What are the components of Audit risk

Answer 11

inherent risk
Control risk
Detection risk

Question 12

What is the relationship between reasonable assurance and audit risk?

Answer 12

Reasonable assurance is high when audit risk is low

Question 13

What does a decrease in control risk result in

Answer 13

decrease in risk of material misstatement (inherent x control risk) –> reduce substantive testing –> decrease increase in detection risk

Question 14

define control risk

Answer 14

The probability that a material misstatement that occurred in the first place would not be detected and corrected by internal controls that are applicable

Question 15

What risks are assessed by the auditor? (2)

Answer 15

Inherent and control risks

Question 16

Define sampling risk

Answer 16

risk the auditors sample results will have characteristics different from the population

Question 17

What is Detection risk (3)

Answer 17

1. function of the effectiveness of an auditing procedure an its application by the auditor
2. Risk the auditor’s procedures fail to discover material misstatements
3. Risk auditor will conclude, based on substantive tests, that a material error does not exist in an account balance when, in fact error does

Question 18

If an auditor decides to shift from emphasis place on analytical procedures to substantive procedures, what is the result of inherent and control risk

Answer 18

Assessed RMM high and lowering detection risk

Question 19

What does it mean to “Transform data”?

Answer 19

Data needs to be cleaned and corrected and errors in data fields may indicate controls are not operating effectively

Question 20

What are the steps in ETL

Answer 20

Extract (Data harvesting)
Transform (clean)
Load