Exam 7: Materiality and Risk

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?

With respect to clients, business risk increases when conditions, events, circumstances or inactions

All other factors held constant, if the auditor decreases audit risk then

The auditor set audit risk at 5%, inherent risk at 100%, and control risk at 50%, and determined a detection risk of 10%. If control risk had been 80%, detection risk would be about

Which of the following types of misstatements has the highest level of certainty?

Risk in auditing means that the auditor accepts some level of uncertainty in performing the audit function. An effective auditor will

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

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

PA is comparing the liabilities section of ABC Ltd. from last year to this year. Last year, ABC Ltd. had large loans due to major shareholders and officers and to one bank. This year, the debt has been reorganized so there are now two different banks used for loans. Instead of having debt to shareholders and officers, the company now owes notes to 25 different foreign investors, who are entitled to convert the debt to shares if interest is not paid or if principal installments are not paid on time. For this year's audit, how will the change in debt structure affect the audit risk model?

If inherent risk is considered at the assertion level, why does the nature of the client's business affect inherent risk?

Your firm has been appointed as the auditor of Bush Mining Inc. (BMI), a company that runs small mining operations in remote areas of northern Canada, primarily in surface mines. You have been assigned the job of senior auditor for BMI. BMI's operations are subject to provincial and federal laws and regulations. These laws and regulations have become stricter in recent years and some of BMI's older mines may be in violation of environmental laws. Surface mining produces tailings (toxic wastes that are dangerous to animal and plant life). These tailings are either further processed and buried or retained in tailings ponds. BMI is required to restore the mining property to a safe condition after a mine is exhausted. BMI has programs in place to monitor and control pollutants that are released to the air and to local waterways. Required: A) What factors would affect the client business risk of BMI? Based upon your assessment of BMI's client business risk, would you adjust audit risk? Why or why not? B) What is your preliminary assessment of audit risk? Justify your answer.

The audit risk model is used primarily

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

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?

The inherent risk of programming errors (and thus processing errors for the affected application systems) increases when

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

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

As the effectiveness of internal control increases, what happens to control risk?

If from last year to the current year's audit, inherent risk has stayed constant but control risk is higher (it is more likely that controls do not detect material errors), what is the likely effect on detection risk?

When a different extent of evidence is needed for the various cycles, the difference is caused by