Principles Of Auditing & Other Assurance Services
21st Edition
ISBN: 9781259916984
Author: WHITTINGTON, Ray, Pany, Kurt
Publisher: Mcgraw-hill Education,
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Question
Chapter 10, Problem 1RQ
To determine
Explain the circumstances that may lead to identify the understatement of assets as a significant audit risk.
Expert Solution & Answer
Explanation of Solution
Audit risk:
The purpose of the audit is to provide an independent and professional opinion on the fairness and accuracy of the financial statements of the company. The auditor of the company is engaged in the analysis of the financial statement to perform the
Audit risk arises when the auditor is not able to find the misstated information in the financial statements of the company. When the financial statement possesses the material misstatement even after the auditing, then it is regarded as an audit risk.
Explain the circumstances that may lead to identify understatement of assets as a significant audit risk:
Following are the circumstances that may lead to identify the understatement of assets as a significant audit risk:
- The management of the company could understate the assets in order to save the income tax. The company need to pay less income in case of decreased asset value.
- The management of the company could have recorded the asset at the discounted amount at the time of purchase.
- The assets could be acquired by the illegal means so the management of the company does not want to show it in the books and the overall value of the assets is understated.
Thus, the management of the company may understate the asset for paying lesser income tax, could have recorded the asset at the discounted amount at the time of purchase and the asset is acquired by the illegal means are the circumstances that may lead to identify understatement of assets as a significant audit risk.
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Students have asked these similar questions
Which of the following terms best describes the risk that audit procedures will fail to detect material misstatements?
a.
Control risk.
b.
Inherent risk.
c.
Detection risk.
d.
Audit risk.
When performing a financial statement audit, auditors are required to explicitly assess the risk of material misstatement due to:Select one:
a.
Illegal acts.
b.
Fraud.
c.
Business risk.
d.
Errors.
Define risk of material misstatement. At what level of the financial statements do auditors measure RMM? Describe how auditors assess the RMM. What role does RMM play in substantive testing?
Chapter 10 Solutions
Principles Of Auditing & Other Assurance Services
Ch. 10 - Prob. 1RQCh. 10 - Prob. 2RQCh. 10 - Prob. 3RQCh. 10 - Prob. 4RQCh. 10 - Prob. 5RQCh. 10 - Prob. 6RQCh. 10 - Prob. 7RQCh. 10 - Prob. 8RQCh. 10 - Prob. 9RQCh. 10 - Prob. 10RQ
Ch. 10 - Prepare an example of lapping of cash receipts,...Ch. 10 - Prob. 12RQCh. 10 - Prob. 13RQCh. 10 - Prob. 14RQCh. 10 - Prob. 15RQCh. 10 - Prob. 16RQCh. 10 - Explain two procedures by which auditors may...Ch. 10 - Prob. 18RQCh. 10 - Prob. 19RQCh. 10 - Prob. 20RQCh. 10 - Prob. 21RQCh. 10 - Prob. 22RQCh. 10 - Prob. 23RQCh. 10 - Prob. 24RQCh. 10 - Prob. 25RQCh. 10 - Prob. 26QRACh. 10 - Henry Mills is responsible for preparing checks,...Ch. 10 - During the first few months of the year, John...Ch. 10 - Prob. 29QRACh. 10 - Prob. 30QRACh. 10 - Prob. 31QRACh. 10 - Prob. 32QRACh. 10 - Prob. 33QRACh. 10 - Prob. 34QRACh. 10 - Prob. 35QRACh. 10 - Prob. 36QRACh. 10 - Prob. 37QRACh. 10 - Select the best answer for each of the following...Ch. 10 - Prob. 38BOQCh. 10 - Prob. 38COQCh. 10 - Prob. 38DOQCh. 10 - Prob. 38EOQCh. 10 - Prob. 38FOQCh. 10 - Reconciliation of the bank account should not be...Ch. 10 - The auditors suspect that a clients cashier is...Ch. 10 - Prob. 38IOQCh. 10 - Prob. 38JOQCh. 10 - Prob. 38KOQCh. 10 - Prob. 38LOQCh. 10 - Which of the following represents a correct...Ch. 10 - Which of the following correctly identifies a risk...Ch. 10 - Which of the following correctly identifies a risk...Ch. 10 - Prob. 39DOQCh. 10 - Prob. 39EOQCh. 10 - Prob. 39FOQCh. 10 - Prob. 40OQCh. 10 - Prob. 41OQCh. 10 - Prob. 42OQCh. 10 - Prob. 43OQCh. 10 - Prob. 44OQCh. 10 - Prob. 45OQCh. 10 - Prob. 46PCh. 10 - Prob. 47PCh. 10 - Prob. 48PCh. 10 - Prob. 49PCh. 10 - Prob. 50ITCCh. 10 - Prob. 51ITCCh. 10 - Prob. 52RDCCh. 10 - Prob. 53EC
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Similar questions
- In auditing, ____________ is the process of identifying and assessing the risks of material misstatement in the financial statements, allowing auditors to tailor their audit procedures accordingly.arrow_forwardOnce risks are identified, auditors assess the risk of material misstatement at the _______ level for these significant classes of transactions and account balances. A. disclosure B. financial statement C. relevant assertion level D. accountarrow_forwardIn obtaining audit evidence, the auditor should use professional judgment to assess the risk of material misstatement (which includes inherent and control risk) and design further audit procedures to ensure this risk is increased to an acceptably high level. TRUE OR FALSE? WHY?arrow_forward
- During financial statement audit, auditors seek to restrict which type of risk? Control risk, Detection risk, Inherent risk, or Account riskarrow_forwardThe risk of a material misstatement in the financial statements arising due to error or omission as a result of factors other than the failure of controls is called: a. Control Risk b. Inherent Risk c. Audit Risk d. Detection Riskarrow_forwardDefine the danger of substantial misrepresentation. RMM is measured by auditors at what level of the financial statements? Explain how auditors evaluate the RMM. What part of substantive testing does RMM play?arrow_forward
- In a financial statement audit, inherent risk represents a. The risk that misstatements could occur and not be detected by the auditor's procedures. b. The risk that misstatements could occur and not be prevented or detected by the system of internal control. c. The risk that the auditor fails to modify materially misstated financial statements. d. The susceptibility of an account balance to misstatement that could be material.arrow_forwardAuditors of financial statements are designed to obtain reasonable assurance of detecting material misstatements due to: Errors and Misappropriation of assets, Errors, Misappropriation, Neither assets and/or misappropriationarrow_forwardWhich of the following tests are considered further audit procedures that may be designed after assesssing the risk of material misstatements? 1. Substantive test of details 2. Risk assessment proceduresarrow_forward
- Which of the following are reasons that auditors conduct analytical procedures at the risk assessment phase of the audit? Select all that apply. O assist with the identification of risk assess if the financial statements reflect the auditor's knowledge of their client O identify accounts at risk of material misstatement O highlight unusual fluctuations in accounts O helps with the calculation of materialityarrow_forwardclarify the relationship between audit risk and materiality determining the right degree of audit risk necessitates an auditor making a determination on materiality.arrow_forwardIncorporating elements of unpredictability in the selection of audit procedures to be performed by auditors is important.Explain whyarrow_forward
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