Exam 9: Materiality and Risk

Dracule Industries is a privately owned business that sells medical product and devices to hospitals,clinics and the public.Certain changes have occurred in Dracule Industries during the year undergoing the audit.Harker needs to evaluate the effect these changes have on audit risk.Audit risk at the financial statement level is influenced by the risk of material misstatement;which include factors related to management,the industry and the entity or a combination thereof.For each of the following changes that have occurred during the year under audit identify the appropriate audit response for the list of responses.Each response can be used once,more than once or not at all.

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

The risk of material misstatement exists only at the overall financial statement level.

Significant risks often relate to routine transactions.

The risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality levels is

The risk of material misstatement refers to

A high detection risk equates to a low amount of audit evidence needed.

Individuals engaged in conducting a fraud will generally not misrepresent information to the auditor.

Based on audit evidence gathered and evaluated,an auditor decides to increase the assessed level of control risk from that originally planned.To achieve an overall audit risk level that is substantially the same as the planned audit risk level,the auditor would

When using the audit risk model,

Since the audit risk model is a planning model,it assists the auditor in evaluating results.

When dealing with audit risk,

If an auditor believes the client will have financial difficulties after the audit report is issued,and external users will be relying heavily on the financial statements,the auditor will probably set acceptable audit risk as low.

Which of the following will generally be considered a significant risk?

Overall assessment of acceptable audit risk is highly subjective.

Using your knowledge of the relationships among acceptable audit risk,inherent risk,control risk,planned detection risk,performance materiality,and planned evidence,state the effect on planned evidence (increase or decrease)of changing each of the following factors,while the other factors remain unchanged. 1. an increase in acceptable audit risk ________ 2. an increase in inherent risk ________ 3. a decrease in control risk ________ 4. an increase in planned detection risk ________ 5. an increase in performance materiality ________

Accounts that require considerable judgment have a higher inherent risk.

Inherent risk is ________ related to planned detection risk and ________ related to the amount of audit evidence.

Inherent risk and control risk are directly related.

The audit risk model that must be used for planning audit procedures and evaluating audit results is: = AAR