The Audit Process - Risk Assessment
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CPA Auditing and Attestation (AUD) › The Audit Process - Risk Assessment
Inherent risk is defined as:
Due to factors other than internal control
Risk that material misstatement would not be detected by internal controls in place
Risk that was not detected by appropriate internal controls
None of the above
Explanation
Inherent risk is defined as risk that exists outside the audit process. It is sometimes termed industry risk.
An auditor compared the current year gross margin with the prior year gross margin to determine if the cost of sales is reasonable. What type of audit procedure was performed?
Analytical procedures
Test of transactions
Test of controls
Test of details
Explanation
Analytical procedures are evaluations of financial information made by a study of plausible relationships among data and they include comparisons between the current year and prior year's financial information.
Risk of material misstatement exists at:
The overall financial statement level
In each transaction
Both A and B
Neither A and B
Explanation
The risk of misstatement appears at the transactional level as well as the financial statement level. The statements can be materially misstated in the aggregate based on a series of misstated transactions or on the whole.
If the management of a company with recently audited financial statements refuses to make a revision to the statements as a result of a material inconsistency, the auditor should __________.
Modify the audit opinion
Withdraw from the engagement
Either
Neither
Explanation
An auditor may modify the opinion of his or her audit if management refuses to correct a material issue, or withdraw from the engagement altogether.
The objective of performing analytical procedures in planning an audit is to identify the existence of:
Related party transactions
Recorded transactions that were not properly authorized
Unusual transactions and events
Acts of noncompliance with laws and regulations that went undetected because of internal control weaknesses.
Explanation
The objective of performing analytical procedures during planning is to discover unusual transactions or events that may have an impact on the planning of the financial statement audit.
Risk is communicated in the audit report as:
adequate assurance
absolute assurance
minimal assurance
reasonable assurance
Explanation
The concept of reasonable assurance is used to guide the auditor when assigning and assessing risk in the audit process.