Concept explainers
a.
Introduction: Audit risk functions with risk of material misstatement and detection risk. It may occur at assertion level or financial statement level. At assertion level risk is of three types - control, inherent and detection. At financial statement level, it related to financial statements wholly or affects many assertions in the financial statements.
To find: Relationship between the level of riskiness of the client and level of misstatement in an account balance that an auditor would consider material.
b.
Introduction: Audit risk functions with risk of material misstatement and detection risk. It may occur at assertion level or financial statement level. At assertion level risk is of three types - control, inherent and detection. At financial statement level, it related to financial statements wholly or affects many assertions in the financial statements.
To find: Effect of auditor’s characteristics on professional judgments about materiality.
c.
Introduction: Audit risk functions with risk of material misstatement and detection risk. It may occur at assertion level or financial statement level. At assertion level risk is of three types - control, inherent and detection. At financial statement level, it related to financial statements wholly or affects many assertions in the financial statements.
To find: Comparison of more skeptical auditor with less skeptical auditor for making the materially judgment in part a.
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Chapter 7 Solutions
Auditing: A Risk Based-Approach to Conducting a Quality Audit
- 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.arrow_forwardIn an audit sampling application, an auditora. Performs procedures on all items in a balance and makes a conclusion about the entirebalance.b. Performs procedures on less than 100 percent of the items in a balance and formulates aconclusion about the entire balance.c. Performs procedures on less than 100 percent of the items in a class of transactions tobecome familiar with the client’s accounting system.d. Performs analytical procedures on the client’s unaudited financial statements when planning the audit.arrow_forwardAuditors use different types of audit procedures to gather the evidencenecessary to conclude that the risk of material misstatement for each relevant assertion has been reduced to an acceptably low level. List eight different types of procedures auditors can use during an audit of financial statements, and give an example of each.arrow_forward
- Define 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_forwardWhich of the following is a correct statement regarding audit evidence? a. A large sample of evidence provided by an independent party is always considered persuasive evidence. b. The auditor must obtain a sufficient amount of relevant and reliable evidence to form an opinion on the fairness of the financial statements. c. A small sample of only one or two pieces of highly appropriate evidence is always considered persuasive evidence. d. Evidence is usually more reliable for balance sheet accounts when it is obtained within six months of the balance sheet date.arrow_forwardAn auditor has completed the risk assessment process for the firm and is evaluating the results. If an auditor has determined that there is a material misstatement which is potentially due to fraud, what are the steps or actions that the auditor should take at this point?arrow_forward
- In considering materiality for planning purposes, an auditor believes that misstatements aggregating 1% of the total assets, where total assets is P1,000,000 would have a material effect on an entity’s balance sheet, but that misstatements would have to aggregate 5% of gross margin, where gross margin is P4,000,000 to materially affect the income statement. Ordinarily, it would be appropriate to design auditing procedures that would be expected to detect misstatements that aggregate Group of answer choices P300,000 P150,000 P100,000 P200,000arrow_forwardTo allocate the preliminary estimate of materiality to the accounts, the auditor might consider A. The relative variability of the accounts. B.The size, in absolute terms, of each account. C.Using the audit risk equation to calculate the amount of materiality to each account. D.Adjusting detection risk for each account to arrive at consistent materiality amounts across accounts.arrow_forwardAnalytical procedures are an important part of the audit process and consist of the evaluation of financial information by the study of plausible relationships among financial and nonfinancial data. Analytical procedures may be done during planning, as a substantive test, or as a part of the overall review of an audit. The following are various statements regarding the use of analytical procedures: Should focus on enhancing the auditor’s understanding of the client’s business and the transactions and events that have occurred since the last audit date Should focus on identifying areas that may represent specific risks relevant to the audit Require documentation in the working papers of the auditor’s expectation of the ratio or account balance Generally use data aggregated at a lower level than the other stages Should include reading the financial statements and notes to consider the adequacy of evidence gathered Not required during this stage Involve reconciliation of…arrow_forward
- The auditor faces a risk that the examination will not detect material misstatements in the financial statements. In regard to minimizing this risk, the auditor primarily relies on: a. Substantive tests b. Internal control c. Tests of controls d. Statistical analysisarrow_forwardIn 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_forwardIf the group engagement partner decides that the component auditor cannot access sufficient appropriate audit evidence regarding the component of the financial statements audited, what type of modified opinion will they consider issuing? O modified opinion due to GAAP departure O modified opinion due to scope limitation O adverse opinion O modified opinion due to GAAS departurearrow_forward
- Auditing: A Risk Based-Approach to Conducting a Q...AccountingISBN:9781305080577Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:South-Western College PubAuditing: A Risk Based-Approach (MindTap Course L...AccountingISBN:9781337619455Author:Karla M Johnstone, Audrey A. Gramling, Larry E. RittenbergPublisher:Cengage Learning