Some account balances, such as those for pensions and leases, are the result ofcomplex calculations. The susceptibility to material misstatements in these types ofaccounts is defined as(1) audit risk.(2) detection risk.(3) inherent risk.(4) sampling risk.
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Some account balances, such as those for pensions and leases, are the result of
complex calculations. The susceptibility to material misstatements in these types of
accounts is defined as
(1) audit risk.
(2) detection risk.
(3) inherent risk.
(4) sampling risk.
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- Choose an alternative which shows the risk of material misstatement in the financial statements arising due to error or omission as a result of lapse of control? a. Control risk b. None of the options c. Detection risk d. Inherent riskASA500 requires the auditor to obtain sufficient appropriate evidence to support the opinion issued in an audit report. Auditors must be persuaded that their opinion is correct with a high level of assurance. In the audit of Jones Computer Parts Co. Ltd the auditor concludes there is a high likelihood of obsolete inventory.Required:Identify the two factors that determine the persuasiveness of audit evidence.Evaluate the following statement: “In many audits in whichaccounts receivable is material, the requirement of confirming customer balances is awaste of time and would not be performed by competent auditors if it were not requiredby auditing standards. When internal controls are excellent and there are a large numberof small receivables from customers who do not recognize the function of confirmation,it is a meaningless procedure. Examples include well-run utilities and retail stores.In these situations, tests of controls and substantive tests of transactions are far moreeffective than confirmations.”
- The auditor assesses the identified fraud risks after taking into account an evaluation of the client’s programs and controls. How might the auditor respond to the results of the assessment of higher fraud risk?Lew Pherson and Vera Collier are friends whoare employed by different CPA firms. One day during lunch they are discussing theimportance of internal control in determining the amount of audit evidence requiredfor an engagement. Pherson expresses the view that internal control must be evaluatedcarefully in all companies, regardless of their size or whether they are publicly held,in a similar manner. His CPA firm requires a standard internal control questionnaireon every audit as well as a flowchart of every transaction area. In addition, he says thefirm requires a careful evaluation of the system and a modification in the evidenceaccumulated based on the controls and deficiencies in the system.Collier responds by saying she believes that internal control cannot be adequate inmany of the small companies she audits; therefore, she simply ignores internal controland acts under the assumption of inadequate controls. She goes on to say, “Why should Ispend a lot of time obtaining an…{Auditing} 4. Audit risk may be considered as the product of Inherent risk, control risk and detection risk. What is the implication of increase in control risk on the audit risk? a. Audit risk reduces b. Audit risk remains unaffected c. Unable to decide d. Audit risk increases
- During a consulting engagement involving the development of a new accounts payable system, an internal auditor identified a control weakness. Although the weakness was reported to the manager of the systems development project, the manager decided to accept the risk because, in the manager's opinion, the risk was not significant. Six months after the implementation of the new system, the disbursements process was audited by another internal auditor who determined that the control weakness had impacted payment processing. The auditor reviewing the disbursements process should do which of the following? None of the choices. Report the control weakness to management and the audit committee Discuss the control weakness with the manager of the accounting system, but do not report the finding Disregard the control weakness because management previously decided to accept the risk Request that the manager of the systems development project fix the system. In comparison to the external auditor, an internal auditor is more likely to be concerned with(1) internal administrative control.(2) cost accounting procedures.(3) operational auditing.(4) internal control.The auditor’s tests of controls revealed that required approvals of cash disbursementswere absent for a large number of sample transactions examined. Which of thefollowing is least likely to be the appropriate auditor response?(1) The auditor will communicate the deficiency to those charged with governance.(2) The auditor will increase the planned detection risk.(3) The auditor will not select more sample items to audit.(4) The auditor will perform more extensive substantive tests surrounding cash disbursements.
- We want to estimate the average purchasing cost of new carspurchased in the last six months. We want a marginerror of $100 at a confidence level of 99%. Aftera preliminary deduction of 50 purchase costs, it is estimatedthe standard deviation at $725. Up to what sample size should wecontinue the investigation?Scaffold Equipment manufactures and sells scaffolds and ladders that are used by construction firms. The products are sold directly to independent retailers in the United States. The company's risk manager knows that the company could be sued if a scaffold or ladder is defective, and someone is injured. Because the cost of products liability insurance has increased, the risk manager is considering other techniques to treat the company's loss exposures.a. Describe the steps in the risk management process.b. For each of the following risk management techniques, describe a specific action using that technique that may be helpful in dealing with the company's products liability exposure.1. Avoidance2. Loss prevention3. Loss reduction4. Noninsurance transfersAs the acceptable level of detection risk decreases, the auditor may do one or moreof the following except change the(1) nature of audit procedures to more effective procedures.(2) timing of audit procedures, by perhaps performing them at year-end rather thanan interim date.(3) extent of audit procedures, by perhaps using larger sample sizes.(4) assurances provided by audit procedures to a lower level