Exam 4: Risk Assessment

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.

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

During the course of the audit of FF Financial,you find that some accounting entries have been altered.You believe this may be the result of management fraud and you have determined that the effect of this could be material to the financial statements.What steps should you take in response to the accounting entries and your concern about management fraud?

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:

In general,material frauds perpetrated by which of the following are most difficult to detect?

Inherent risk is the susceptibility of an assertion to material misstatement,assuming no related controls.

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

Client risk as defined in the text is

The objectives of the engagement partner's communication with the audit team include

Which of the following procedures would not be used to obtain an understanding of the entity and its environment?

What is the difference between audit risk and engagement risk?

Which of the following is a known misstatement?

The achieved (actual)level of audit risk

DATRIX,Inc.,a Fortune 500 company,has been experiencing poor performance.Industry analysts have been issuing negative reports and the company's stock price has been steadily declining.As an auditor,what would concern you about the audit engagement of DATRIX,Inc.

Engagement risk can be eliminated by

All of the following are inherent risk factors that are pervasive to the financial statements except:

Your classmate asserts,"Accountants shouldn't need to take business courses besides accounting,because they are only interested in the financial statements of a company." Defend or refute this statement.

Which of the following is a source of detection risk?

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

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