Exam 7: Assessing the Risk of Material Misstatement

In practice,auditors rarely assign numerical probabilities to inherent risk,control risk,or acceptable audit risk.It is more common to assess these risks as high,medium,or low.For each of the four situations below,fill in the blanks for detection risk and the amount of evidence you would plan to gather ("planned evidence")using the terms high,medium,or low. SITUATION

What is a nonroutine transaction,and give two examples of a nonroutine transaction.

The risk that an auditor's procedures will lead to the conclusion that a material error does not exist in an account balance when,in fact,such error does exist is referred to as

When inherent risk is assessed as higher (i.e.more material errors are likely to exist)and control risk is assessed the same from one year to the next,what is the likely effect on detection risk?

In addition to representing an assessment of whether a client's internal control is effective for preventing or detecting misstatements,control risk also represents the

Significant risk often relates to

An important role of inherent risk assessment during the audit process is the need to

Which of the following describes the components of the audit risk model that are used to describe the risk of material misstatement (RMM)?

If detection risk is reduced,the amount of evidence the auditor accumulates will

You generally consider your audit client's management to be honest.However,they do have a bias towards wanting to understate their income to lower income taxes.How would this bias be implemented in the audit risk model?

If the auditor assessed the detection risk as high,the extent of evidence the auditor plans to accumulate is

A PA is working on the audit of a publicly held corporation.At what level will the acceptable auditor likely set audit risk?

How much control does the auditor have over inherent risk?

Which of the following best describes risk assessment,from an auditor's perspective?

Big Box Distribution Company has an in-house information systems department of 50 people.The company generally does its own programming,although some software was acquired as a software package.A software package was purchased for customer relationship management,which will be modified by the programming staff. Procedures for implementing programs vary by department.All major changes are approved by the Management Information Systems steering committee.The committee is also given a list of the maintenance changes that are planned in the coming year.Some departments request that the data processing department handle testing,while other users are rather picky and want to do their own testing.Requirements are generally prepared in writing,although small maintenance changes may be handled verbally. Required: Assess inherent risk associated with program changes at Big Box.

Using the acceptable audit risk model,audit risk describes targeted assurance,while control risk and inherent risk are assessed based upon a variety of factors.Of the components of the audit risk model,which is most likely to be set to 100%?

Discuss three factors that affect client business risk and therefore acceptable audit risk.

The audit risk model is

What is the role of internal controls during the assessment of inherent risk?

What are the factors that increase the risk of material misstatement at the overall financial statement level?