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Week 7: What Is The Magnitude of Audit Risk If Inherent Risk Is .50, Control Risk Is .40 and Detection Risk Is .10?

The relationship between control risk and detection risk is usually inverse. Inherent risk refers to the susceptibility of an account to misstatements assuming no internal controls. Control risk is the risk that controls will not detect a material misstatement. The audit risk model is used primarily for audit planning to determine how much evidence to accumulate. The most conservative assessment would be inherent risk of 0.5, control risk of 0.4, resulting in an audit risk of 0.02. Audit risk consists of all components except substantive risk. An effective auditor recognizes risk exists and deals with it appropriately. Audit risk is the risk an incorrect opinion is expressed on financial statements.

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Shane Cabingan
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323 views3 pages

Week 7: What Is The Magnitude of Audit Risk If Inherent Risk Is .50, Control Risk Is .40 and Detection Risk Is .10?

The relationship between control risk and detection risk is usually inverse. Inherent risk refers to the susceptibility of an account to misstatements assuming no internal controls. Control risk is the risk that controls will not detect a material misstatement. The audit risk model is used primarily for audit planning to determine how much evidence to accumulate. The most conservative assessment would be inherent risk of 0.5, control risk of 0.4, resulting in an audit risk of 0.02. Audit risk consists of all components except substantive risk. An effective auditor recognizes risk exists and deals with it appropriately. Audit risk is the risk an incorrect opinion is expressed on financial statements.

Uploaded by

Shane Cabingan
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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WEEK 7

 Relationship between control risk and detection risk is ordinarily? Inverse


 The susceptibility of an account to misstatements assuming no internal control is
referred to as the? Inherent risk.
 For a particular assertion, control risk is the risk that: Control will not detect
material misstatement that occurs
 The audit risk model is used primarily? For planning purposes in determining how
much evidence to accumulate
 Which of the following would be considered the most conservative for inherent
and control risk? Inherent risk  - Control risk 1.0 -  1.0
 What is the magnitude of audit risk if inherent risk is .50, control risk is .40 and
detection risk is .10? .02

Audit risk consists of all but the following components? Substantive Risk
Risk in auditing means that the auditor accepts some level of uncertainty in
performing the audit function. An effective auditor will? Recognize the risk exists
and deal with them in an appropriate manner
 The risk that the auditor may express an incorrect opinion on the financial
statements is called? Audit Risk
WEEK 8
 The following circumstances result in a modified, but unqualified report, except:
Lack of disclosure of a restriction on payment of dividends
 An auditor who concludes, that an uncertainty is not adequately disclosed in the
financial statements issue a(an): Qualified report
 An auditor’s report contains the following sentences: “We did not audit the
financial statements of B company, a consolidated subsidiary, whose statements
reflect total assets and revenues constituting 31% and 22% respectively, of the
consolidated totals. These statements were audited by other auditors, whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for B Company, is based solely upon the report of other
auditors.” These sentences divide responsibility.
 What is the purpose of the following paragraph in an audit report on financial
statements? “we draw attention to note X in the financial statement which
discusses that the company is a subsidiary of another company” Emphasis of a
matter
 Which of the following statements is not correct about “emphasis of a matter
paragraph”? The addition of such paragraph is not to be construed as a
modification.
 An auditor may wish to emphasize a matter included in the financial statements
by adding a separate paragraph to the audit report. In this case the following
paragraphs of the audit report should be modified: None
 If principal auditors make no reference to other auditors whose work they have
relied on as a part of the basis for their report, the principal auditors are taking full
responsibility for the work of the other auditors.
 A separate paragraph following an opinion paragraph that describes an certainty
follows: “As discussed in Note X to the financial statements, the company is a
defendant ill a lawsuit alleging infringement of certain patent rights and claiming
damages. Discovery proceedings are in progress. The ultimate outcome of the
litigation cannot presently be determined. Accordingly, no provision for liability
that may result upon adjudication has been made in the accompanying financial
statements…” The auditor’s report would most likely contain a(an): Unqualified
Opinion
 Three of the following conditions would, by itself, require the auditor to issue a
report other than the Unqualified report. Which one would not require such a
departure? Client company’s financial statements show a significant net loss
each of the last three years, including the current fiscal period.
 Which of the following circumstances will not affect the auditor’s opinion?
Significant uncertainties affecting the financial statements
WEEK 9
 Which of the following internal control objectives would be most relevant to the
audit? Financial reporting objective
 The primary responsibility for establishing and maintaining and internal control
rests with? Management and those charged with governance
 Internal Control can provide only reasonable assurance of achieving entity’s
control objectives. One factor limiting the likelihood those objectives is that? The
cost of internal control should not exceed its benefits.
 An effective system of internal control can reduce the cost of external audit
 The overall attitude and awareness of an entity’s board of directors concerning
the importance of the internal control usually is reflected in its control
environment
 In an audit of financial statements, an auditor’s primary consideration regarding
an internal control activity is whether the control is? Affects management’s
financial statement assertions
 Which of the following is not one of the components of an entity’s internal
control? Control risk
 An auditor would likely be concerned with internal control policies and
procedures that provide reasonable assurance about the? Entity’s ability to
process and summarize financial data
 The main purpose of implementing a system of quality control is to provide the
firms with reasonable assurance that? All of the above (The firm and its
personnel will comply regulatory and legal requirements; the audit will be
performed in accordance with PSA; the firm will issue a report that is appropriate
in the circumstances)
 The fundamental purpose of an internal control is to? Provide reasonable
assurance that the objectives of the organization are achieved.
WEEK 10
 The primary reason that auditors cross-index their working papers is to: Provide
a trail for the auditor and the reviewer.
 In which of the following circumstances would the use of the negative form of
accounts receivable confirmation most likely be justified? A small number of
accounts may be in dispute, and the accounts receivable balance arises from
sales to many customers with small balances.

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