Chapter 4: Management Fraud and Audit Risk

Question 1

What is audit risk?

Answer 1

the probability that an audit team will express an inappropriate audit opinion when the finanical statements are materially misstated

Question 2

A management assertion that has a reasonable possibility of containing a material misstatement without regard to the effect of internal controls is considered a ______ assertion.

Answer 2

relevant

Question 3

Which type of risk is the susceptibility of the account to misstatement?

Answer 3

inherent risk

Question 4

The probability that the client’s internal control activities will fail to prevent or detect material misstatements provided they enter or would have entered the accounting system is ______ risk.

Answer 4

control

Question 5

What’s another name for residual risk?

Answer 5

detection risk

Question 6

Tests of details and analytical procedures which study plausible relationships are the two categories of ____ ______.

Answer 6

substantive procedures

Question 7

For a cash account, which is riskier? Existence or Completeness

Answer 7

existence

Question 8

For accounts payable, which is riskier? Existence or Completeness

Answer 8

completeness

Question 9

A higher assessed risk of material misstatement for a relevant assertion being audited ______ detection risk.

Answer 9

reduces

Question 10

T/F: Detection risk is based on the desired level of audit risk and assessed levels of inherent and control risk

Answer 10

True

Question 11

T/F: The desired level of audit risk is based on the assessed level of inherent, control, and detection risk

Answer 11

False

Question 12

T/F: Detection risk is the amount of risk the auditor can allow

Answer 12

True

Question 13

T/F: Detection risk is calculated and derived from other risks

Answer 13

True

Question 14

T/F: Detection risk determines the overall level of audit risk

Answer 14

False

Audit risk determines the overall level of detection risk

Question 15

What are the two categories of substantive procedures?

Answer 15

1. Tests of details
2. Analytical procedures which study plausible relationships

Question 16

Do most firms express their audit risk using quantitative or qualitative measures?

Answer 16

qualitative measures (high, medium, low)

Question 17

Management fraud is sometimes referred to as ____ ____ ____.

Answer 17

fraudulent financial reporting

Question 18

What is defined as “the theft of an entity’s assets and is often perpetrated by employees in relatively small or immaterial amounts” ?

Answer 18

misappropriation of assets

Question 19

What is employee fraud?

Answer 19

the use of fraudulent means to misappropriate funds or other property from an employer

Question 20

Employee fraud can be classified as either _____ or ______ .

Answer 20

1. embezzlement
2. larceny

Question 21

What is embezzlement?

Answer 21

invovles employees or nonemployees wrongfully misappropriating funds entrusted in their care

Question 22

What is larceny?

Answer 22

theft; misapropriation of funds or property not entrusted in ones care

Question 23

What is another name for employee fraud, embezzlement, and larceny?

Answer 23

Defalcation

Question 24

According to professional standards ______ __ underlies the entire audit process.

Answer 24

risk assessment

Question 25

Intentional misstatements in financial statements to deceive financial statement users is the definition of ___ ___ ____ .

Answer 25

fraudulent financial reporting

Question 26

What factors can be related to the susceptibility of accounts to misstatement or fraud? (5)

Answer 26

- dollar size of the account - liquidity - volume of transactions - complexity of the transactions - subjective estimates

Question 27

What are related parties?

Answer 27

Individuals or organizations that can influence or be influenced by decisions of the company, possibly through family ties or investment relationships

Question 28

The basis for executing and appropriate response to identified risks is ____ risk assessment.

Answer 28

inherent

Question 29

Valuation of investment securities, deprecation, and net realizable value of accounts receivable are all examples of _____ _____.

Answer 29

accounting estimates

Question 30

Risks that could adversely affect a company's ability to achieve its objectives and execute its strategies are called ____ risks.

Answer 30

business

Question 31

An auditor's primary objective in regard to ____ ____ is to obtain the evidence needed to determineif transactions with them have been properly accounted for and disclosed in the financial statements.

Answer 31

related parties

Question 32

When auditors develop an expectation about what an account balance should be and compare the expectation to the recorded analysis, the auditor is performing a preliminary ____ _____.

Answer 32

analytical procedure

Question 33

On every audit engagement, the risk assessment process includes required ____ sessions in which critical audit areas are discussed.

Answer 33

brainstorming

Question 34

At the preliminary stage, analytical procedures are ____ tests.

Answer 34

reasonableness ## Footnote Auditors compare their expectation for each of the account balances with those recorded by management

Question 35

T/F: Audit team brainstorming sessions are a required audit engagement component.

Answer 35

True ## Footnote to discuss critical audit team issues

Question 36

What are risks that require special audit consideration becuase of the nature or likelihood and potential magnitude of misstatement related to them?

Answer 36

significant risks

Question 37

What is indirect-effect noncompliance?

Answer 37

violations of laws and regulations not directly connected to financial statements

Question 38

What is direct-effect noncompliance?

Answer 38

produces direct and material effects on financial statement amounts

Question 39

If the potential for fraud is high, auditors should perform _____ _____, including targeting tests towards higher risk areas, and performing more tests of transactions at year end, rather than interim points.

Answer 39

extended procedures

Question 40

A violation of pension laws or government contract regulations is an example of ____ ____ noncompliance.

Answer 40

direct-effect