Exam 4: Risk Assessment

An auditor learns that a client's employee in control of inventory gets divorced and is responsible for paying a large amount of child support.All of the following for the audit of inventory likely are true except:

Stacey,the partner in charge of the audit of RIF Enterprises,sets the planned level of audit risk for the audit of accounts payable at.06.The risk of material misstatement is assessed at .65.What is the detection risk for this audit?

As the acceptable level of detection risk decreases,the assurance directly provided from

The auditor is most likely to presume that a high risk of a fraud exists if

Client risk as defined in the text is

The risk of material misstatement differs from detection risk in that it

The risk of material misstatement includes which of the following?

Which of the following is correct concerning required auditor communications about fraud?

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

You are teaching a class of new hires at your international accounting firm.Explain the audit risk model using a mathematical formula. AR = RMM × DR AR = Audit risk RMM = Risk of material misstatement DR = Detection risk

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

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

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