Topics: Auditing, Internal control, Financial audit Pages: 59 (10784 words) Published: August 3, 2014
Engagement risk is

The risk of issuing an incorrect audit opinion.

The auditor's risk of loss from events arising in connection with financial statements audited and reported upon.
The overall risk of material misstatement.

The risk of the client's financial failure.
Client risk as defined in the text is

The auditor's risk of loss from events arising in connection with financial statements audited and reported upon.
The overall risk of material misstatement.

The risk that audit procedures will fail to detect material misstatements.
The risk of the client's financial failure.
Under Statements on Auditing Standards, which of the following would be classified as an error?
Misappropriation of assets for the benefit of management.

Misinterpretation by management of facts that existed when the financial statements were prepared.
Preparation of records by employees to cover a fraudulent scheme.
Intentional omission of the recording of a transaction to benefit a third party. 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.

Consistent with prior periods.

Insensitive to variations.

Similar to industry guidelines.
Which of the following characteristics most likely would heighten an auditor's concern about the risk of intentional manipulation of financial statements?
Turnover of senior accounting personnel is low.

Insiders recently purchased additional shares of the entity's stock.
Management places substantial emphasis on meeting earnings projections.
The rate of change in the entity's industry is slow.
Which of the following is a known misstatement?

A management estimate that is outside the range of reasonable outcomes determined by the auditor.
A fixed asset being recorded at the incorrect cost.

A projected misstatement resulting from errors found during sampling.
Difference in judgment between the auditor and management.
Engagement risk can be eliminated by

Establishing policies for client acceptance and continuance.
Lowering audit risk.

Lowering materiality.

Engagement risk cannot be eliminated.
The achieved (actual) level of audit risk

Can always be accurately assessed by the auditor.

Should be greater than or equal to acceptable audit risk.

Can never be known with certainty.

Is the same for all audit clients.
An auditor knows that an audit client operating in an industry in which common stock is valued based on the price-earnings ratio will soon make an initial public offering. All of the following are true except:

Materiality should be reduced.

Risk of material misstatement should increase.

Detection risk should increase.

Audit risk should increase.
The risk that an auditor will conclude, based on substantive procedures, that a material error does not exist in an account balance when, in fact, such an error does exist is referred to as
Sampling risk.

Detection risk.

Nonsampling risk.

Inherent risk.
The risk of material misstatement differs from detection risk in that it
Arises from the misapplication of auditing procedures.

May be assessed in either quantitative or qualitative terms.
Exists independently of the actions of the auditor.

Can be changed at the auditor's discretion.
All of the following are inherent risk factors that are pervasive to the financial statements except:
Highly complex significant transactions.

Non-routine transactions.

Classes of transactions are not processed systematically.

Supplies inventory is difficult to count.
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 the
Extent of tests of controls.

Level of...
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