 Show Page 1 of 7 AT-5909 CPA REVIEW SCHOOL OF THE PHILIPPINES M a n i l a AUDITING THEORY Risk Assessment and Response to Assessed Risks Related PSAs: PSA 400, 315 and 330 1. Which of the following is correct statement? a.The auditor should use professional judgment to assess auditrisk and to design audit procedures to ensure it is eliminated. b. The auditor is an insurer, and his or her report constitutes a guarantee. c. The subsequent discovery that a material misstatement exists in the financial statements is evidence of inadequate planning, performance, or judgment on the part of the auditor. d.The auditor should obtain an understanding of the accounting and internal control systems sufficient to plan the audit and develop an effective audit approach. 2. According to PSA 400 – Risk Assessments and Internal Control, audit risk means a.The susceptibility of an account balance or class of transactions to misstatement that could be material, individually or when aggregated with misstatements in other balances or classes, assuming that there wereno related internal controls. b.The risk that a misstatement, that could occur in an account balance or class of transactions and that could be material, individually or when aggregated with misstatements in other balances or classes, will not be prevented or detected and corrected on a timely basis by the accounting and internal control systems. c. The risk that an auditor’s substantive procedures will not detect a misstatement that exists in an account balance or class of transactions that could be material, individually or when aggregated with misstatements in other balances or classes. d.The risk that the auditor gives an inappropriate audit opinion when the financial statements are materially misstated. 3. Inherent risk and control risk differ from detection risk in that they a. Arise from the misapplication of auditing procedures. b. May be assessed in either quantitative or nonquantitative terms. c. Exist independently of the financial statement audit. d. Can be changed at the auditor’s discretion. 4. Inherent risk and control risk differ from detection risk in that inherent risk and control risk are a. Elements of audit risk while detection risk is not. b. Changed at the auditor’s discretion while detection risk is not. c. Considered at the individual account-balance level while detection risk is not. d. Functions of the client and its environment while detection risk is not. 5. Which of the following is an incorrect statement? a. Detection risk is a function of the effectiveness of an auditing procedure and its application. b. Detection risk arises partly from uncertainties that exists when the auditor does not examine 100 percent of the population. c. Detection risk arises partly because of other uncertainties that exist even if the auditor were to examine 100 percent of the population. d. Detection risk exists independently of the audit of the financial statements. 6. Which of the following is an incorrect statement? a. Detection risk cannot be changed at the auditor’s discretion. b.If individual audit risk remains the same, detection risk bears an inverse relationship to inherent and control risks. c. The greater the inherent and control risks the auditor believes exists, the less detection risk that can be accepted. d.The auditor might make separate or combined assessments of inherent risk and control risk. 7. Why would the auditor assess control risk? a. Because it indicates where inherent risk may be the greatest. b. Because it determines whether sampling risk is sufficiently low. c. Because it affects the level of detection risk the auditor may accept. d. Because it includes the aspects of nonsampling risk that are controllable. How does an auditor assess control risk?The auditor should assess control risk for relevant assertions by evaluating the evidence obtained from all sources, including the auditor's testing of controls for the audit of internal control and the audit of financial statements, misstatements detected during the financial statement audit, and any identified ...
Which of the following risks can be controlled by the auditor?Answer: D. Planned detection risk. Detection risk is the risk that the auditor fails to detect material misstatement in the financial statements.
Which of the following is a step in an auditor's decision to assess control risk below the maximum?Assessing control risk below the maximum level most likely would involve: identifying specific control activities relevant to specific assertions. As the acceptable level of detection risk decreases, an auditor may: postpone the planned timing of substantive tests from interim dates to the year-end.
Which of the following are part of the risk assessment phase of an audit?The risk assessment phase includes gaining an understanding of the client, identifying significant accounts and transactions, setting planning materiality, identifying the factors that can go wrong in the audit, gaining an understanding of key internal controls and developing an audit strategy.
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Which of the following statement is correct concerning an auditors assessment of control risk?
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