Chapter 4 Audit Quiz

[blank_start]Engagement[blank_end] risk is the risk that the auditor is exposed to financial loss or damage to his or her professional reputation from litigation, adverse publicity, or other events arising in connection with the audited financial statements.

[blank_start]Audit[blank_end] risk is the risk that we miss a misstatement in the financial statements. It focuses on entire financial statements.

Inherent risk is the likelihood that a material misstatement in the financial statements exists without considering the client's internal controls.

Control risk is the risk that the client's internal controls will distract from potential misstatements.

"Inherent control risk" and "client risk" are terms that can be used interchangeably. They both refer to the combination of risks that the client can control.

[blank_start]Detection[blank_end] risk is the risk that the auditor is willing to accept that he or she will fail to detect a material misstatement in the financial statements.

The audit risk model can be found with the following formula: AR = [blank_start]RMM[blank_end] x DR

An alternative equation for the audit risk model is: AR = (IR x CR) x [blank_start]DR[blank_end]

Increased RMM and decreased DR means you should increase the amount of testing.

Increased IR with decreased DR means you should decrease the amount of testing.

Increased CR means decreased DR, so the amount of testing will decrease.

Increased AR means DR is increased, which means the amount of testing will decrease.

If detection risk has gone up, that probably points to which of the following?

The three conditions that usually exist when fraud occurs are opportunity, incentive, and [blank_start]rationalization[blank_end].

Which of the following is NOT an aspect of SAS 99

If fraud is suspected, the auditor should obtain additional evidence, consider the impact on the rest of the audit, discuss the problem with management on level above the level where the fraud occurred, suggest that the client consult with legal counsel, and consult legal counsel themselves.