Exam 4: Risk Assessment

Stacey, the partner in charge of the audit of GHER Corporation, calculates that detection risk to be 5.7% for the audit of accounts payable. GHER Corporation and RIF Enterprises are in the same industry, close to the same size, and have similar balances in accounts payable. What do the different detection risks tell you about the planned audit evidence that will be gathered for the GHER Corporation audit?

All of the following represent an increased opportunity for management to commit fraud except:

Client risk as defined in the text is:

Audit risk is the auditor's exposure to loss or injury of his or her reputation from events arising in connection with financial statements audited.

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:

You are the senior on an audit of Two Be Gone, a large public company. The company recently completed an acquisition of its fifth largest competitor. What risks might this present? How will you, the auditor, respond to these risks (i.e., what actions should you take)?

On the basis of audit evidence gathered and evaluated, an auditor decides to increase the assessed level of risk of material misstatement 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:

As the acceptable level of detection risk decreases, an auditor may change the:

The auditor is most likely to presume that a high risk of a fraud relating to the misappropriation of assets exists if:

The combination of inherent risk and control risk is referred to as client risk.

The risk of a material misstatement includes inherent risk and sampling risk.

Which of the following is not an important consideration in an auditor's evaluation of an entity's business risk?

Assume that you are the new audit senior on the LV Drug Corporation (LVD)engagement. LVD is a pharmaceutical company that has three successful drugs and a number of drugs in progress in its research and development pipeline. You are considering your audit plan and it is important to identify the inherent risks that LVD has and how they relate to the planning process. Required: For each of the following factors, indicate whether it will tend to increase, decrease, or have no effect on inherent risk, and the reasoning for your answer. a. Dr. Jones is the major shareholder of LVD and its CEO. b. Your firm has audited LVD for the last four years. c. There has been high turnover of key accounting personnel during the last two years. d. The internal audit function reports to the audit committee. e. LVD has been the subject of lawsuits by users of Framadon who claim that the drug affects their liver functions. LVD is confident that there are no such side effects from the use of Framadon.

Which of the following is a factual misstatement?

A properly planned and performed audit may fail to detect a material misstatement resulting from fraud because:

Increased fraud risk could result in all of the following except:

An auditor discovers a likely fraud during an audit but concludes that the overall effect of the fraud is not sufficiently material to affect the audit opinion. The auditor should probably: