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Flashcards in Chapter 4 Deck (32):
1

What 2 concepts are pervasive in the application of GAAS, particularly the standards of fieldwork and reporting?

Materiality & Audit Risk

2

The statement that the audit obtains "Reasonable Assurance" indicates the existence of what?

Audit Risk

3

What two components make up Risk of Material Misstatement (RMM)?

Control Risk + Inherent Risk

4

As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to...

Find Smaller Errors

5

Company management falsifies inventory count tags, therby overstating ending inventory and understating cost of sales is an example of what?

Fraudulent Financial Reporting

6

Fraud involving Senior Management should be reported to who?

The Audit Committee

7

The risk that an auditor's procedures will lead to a conclusion that a material misstatement in an account balance does not exist when, in fact, a misstatement does is known as what?

Detection Risk

8

What are three ways that an auditor obtains an understanding of the entity and its environment

1) Inquiries of Management
2) Analytical Procedures
3) Observations and Inspections

9

Evaluations of financial information made through analysis of plausible relationships among both financial and non-financial data.

Analytical Procedures

10

Specific acts performed by the auditor in gathering evidence to determine if specific assertions are being met.

Audit Procedures

11

Risk that a misstatement could occur in an assertion about a class of transactions, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control.

Control Risk

12

The risk that the auditor is exposed to financial loss or damage to his or her professional reputation from litigation, adverse publicity, or other events arising in connection with financial statements audited and reported on.

Engagement Risk

13

Unintentional misstatements or omissions of amounts or disclosures.

Errors

14

Intentional misstatements that can be classified as fraudulent financial reporting and/or misappropriation of assets.

Fruad

15

Nature, timing, and extent of the Audit

Scope of the Audit

16

What is the 3 components of the Fraud Risk Triangle

1) Incentive or Pressure
2) Opportunity
3) Rationalization or Attitude

17

What steps does the auditor perform to identify Fraud?

1) Discussion with audit team
2) Inquire management and others of the entity
3) Consider unusual relationships identified in planning
4) Understand period-end closing process and unexpected period-end adjustments.

18

What is the Audit Risk Equation?

AR = (IR x CR) x DR

19

Detection Risk has what type of relationship with Inherent and Control Risk?

Inverse

20

How much control does the auditor have over Risk of Material Misstatement?

Little or no control

21

Risk of Material Misstatement before considering Internal Controls

Inherent Risk

22

Auditors must consider fraud risk involving what class of transaction per audit standards?

Revenue Recognition

23

Engagement Risk is the Auditor's exposure to loss or injury of his or her reputation from events arising in connection with financial statements audited (T/F).

True

24

Client Risk includes Inherent and Control Risk (T/F).

True

25

When assessing the risk of material misstatement, auditors evaluate the reasonableness of an entity's accounting estimates. An auditor normally would be concerned about assumptions that are...

Susceptible to Bias

26

The acceptable level of detection risk is inversely related to the...

Extent of Substantive Procedures

27

When an auditor increases the assessed level of risk of material misstatement because certain control procedures were determined to be ineffective, the auditor would most likely increase what?

Extent of Substantive Procedures

28

In general, material frauds perpetrated by who are the most difficult to detect?

Controller

29

Name the situations that cause an increase in opportunity for management to commit fruad

1. Significant related party transactions
2. Management is dominated by a single person
3. The financial statements included highly subjective estimates

30

An auditor learns that a client's employee in control of inventory gets divorced and is responsible for paying large amount of child support. What risk would not be affected by the situation?

Detection Risk

31

The auditor can respond to an increased risk of fraud by doing what?

1. Assign more experienced staff to the audit
2. Obtain more reliable evidence
3. Emphasizing professional skepticism

32

Two types of misstatements

1. Known
2. Likely