Chapter 4 - Fraud and Audit Risk

Question 1

audit risk is the..

Answer 1

risk of giving a “clean” opinion when the F/S are actually materially misstated

Question 2

the components of audit risk

Answer 2

1. inherent risk
2. detection risk
3. control risk

Question 3

what risks do auditors have no control over?

Answer 3

inherit and control

Question 4

inherent risk is..

Answer 4

the risk that material misstatement exists in the absence of controls

Question 5

three factors that affect inherent risk

Answer 5

1. nature of client’s business to achieve competitive advantage
2. types of transactions
3. effectiveness and integrity of managers and accountants

Question 6

three factors that affect control risk

Answer 6

1. control environment
2. the existence and effectiveness of controls
3. monitoring activities

Question 7

detection risk is the..

Answer 7

likelihood that the auditors substantive procedures will fail to detect MM

Question 8

three factors that affect detection risk

Answer 8

1. nature, timing, and extent of audit procedures
2. sampling risk
3. no sampling risk: the risk that auditors may reach an inappropriate conclusion based upon available evidence

Question 9

high RMM =

Answer 9

more work

Question 10

lower RMM =

Answer 10

less work

Question 11

high controls risk =

Answer 11

more work

Question 12

when more work has to be done, we adjust…

Answer 12

nature timing and extent

Question 13

2 types of testing

Answer 13

1. analytical
2. detail

Question 14

analytical testing is more…

Answer 14

efficient

Question 15

detail testing is more…

Answer 15

effective

Question 16

The difference between fraud and error is…

Answer 16

intent

Question 17

three categories of factors that might indicate an increased risk of fraudulent FR

Answer 17

1. management’s characteristics and influence
2. industry conditions
3. operating characteristics and financial stability

Question 18

larceny is..

Answer 18

simple theft

Question 19

defalcation is another name for..

Answer 19

larceny, employee fraud, and embezzlement

Question 20

Financial statement fraud has ____ frequency and ____ damage and loss

Answer 20

low, high

Question 21

asset fraud has ____ frequency and ____ damage and loss

Answer 21

high, low

Question 22

what are the top 3 ways of detecting fraud?

Answer 22

1. hotline
2. internal audits
3. internal controls

Question 23

inherit risk refers to…

Answer 23

the exposure or susceptibility of an assertion within an entity’s financial statements to a MM without regard to internal controls

Question 24

Misstatement by assertion: invalid transactions reported

Answer 24

occurrence

Question 25

Misstatement by assertion: valid transactions are omitted from the financial statements

Answer 25

completness

Question 26

Misstatement by assertion: transaction amounts are inaccurate

Answer 26

accuracy

Question 27

Misstatement by assertion: transactions are classified into the wrong accounts

Answer 27

classifications

Question 28

to identity risks, you must understand the clients...

Answer 28

business

Question 29

information sources are used to..

Answer 29

understand the client's business

Question 30

general business sources examples

Answer 30

business magazines, trade journals

Question 31

company source examples

Answer 31

partnership agreements, bylaws, contracts, meeting minutes

Question 32

three information sources used

Answer 32

1. general business 2. company source 3. info from past audits

Question 33

preliminary analytical procedures help...

Answer 33

1. identify potential problem areas 2. provide a standard starting place to start examining the f/s 3. help familiarize auditor with client

Question 34

when are auditors required to perform preliminary analytical procedures

Answer 34

planning stage

Question 35

how many steps are there to completing analytical procedure?

Answer 35

five

Question 36

5 steps to completing primary analytical procedures

Answer 36

1. develop an expectation 2. define a significant difference 3. compare expectations with the recorded amounts 4. investigate significant difference 5. document each of the preceding steps

Question 37

analytical procedures can be and are used for...

Answer 37

substantive testing

Question 38

audit team brainstorming discussions are a....

Answer 38

required procedure

Question 39

audit team brainstorming discussions objectives are to gain understand of...

Answer 39

previous client experiences, how fraud may be concealed in the entity, procedures that might detect fruad

Question 40

audit team discussions set the..

Answer 40

proper tone for the audit

Question 41

discussions are ______ in the engagement

Answer 41

ongoing

Question 42

inquiries typically are a...

Answer 42

set of questions that you sit down and talk about

Question 43

the assessment of inherent risk needs to occur for...

Answer 43

each significant financial statement account and disclosure

Question 44

the auditor should evaluate _____ associated with the financial statement account or disclosure

Answer 44

qualitative and qualitative

Question 45

after significant accounts and disclosures have been identified, the auditor needs to...

Answer 45

identify the relevant financial assertion

Question 45

a financial statement is significant if...

Answer 45

it has a reasonable possibility of containing a misstatement that would cause the financial statements to be materially misstated

Question 46

"what could go wrong?" cash significant assertions

Answer 46

existence, valuation, presentation, disclosure

Question 47

"what could go wrong?" A/R significant assertions

Answer 47

existence, completeness, valuation

Question 48

cash existence could be...

Answer 48

embezzlement

Question 49

cash valuation could be...

Answer 49

foreign currency

Question 50

cash presentation could be...

Answer 50

restricted cash

Question 51

presume that improper revenue recognition is a...

Answer 51

fraud risk

Question 52

identify risks of management...

Answer 52

override controls

Question 53

to identify risks of management override of controls we...

Answer 53

examine Jesus and other adjustments, review accounting estimates for biases, and evaluate business rationale for significant unusual transactions

Question 54

SIGNIFICANT risks are..

Answer 54

risks that require special audit consideration because of the nature of the risk or the likelihood or potential of material misstatement

Question 55

evidence of fraud must be communicated to who usually?

Answer 55

someone one level above

Question 56

any fraud committed by management is...

Answer 56

material

Question 57

any fraud committed by management should be communicated to who?

Answer 57

those charged with governance

Question 58

direct effect non-compliance produce...

Answer 58

direct and material effects on financial statements

Question 59

Auditors responsibility for direct noncompliance is to...

Answer 59

design procedures to provide reasonable assurance

Question 60

indirect-effect non-compliance are...

Answer 60

not related to specific amounts or disclosures on the financial statements

Question 61

auditors responsibility for non direct noncompliance is to...

Answer 61

follow up on suspected violations material to financial statements

Question 62

audit strategy memorandum is basically...

Answer 62

a long planning memo

Question 63

the auditor establishes an overall audit strategy that sets the...

Answer 63

scope, timing, and direction for auditing each relevant assertion

Question 64

the audit strategy is a result of the..

Answer 64

risk model

Question 65

in establishing the overall audit strategy, auditors should consider...

Answer 65

1. reporting objectives and communications required 2. auditor's risk assessment 3. other requirements of laws and regulations

Question 66

memo is basis for...

Answer 66

preparing detailed audit plans