Assessment of the risk of material misstatements.

The following questions concern the assessment of the risk of material misstatements. Choose the best response. Which of the following circumstances most likely would cause the auditor to suspect that there are material misstatements in the entity's financial statements? Significant differences between the physical inventory count and the accounting records are not investigated. Which of the following statements describes why a properly designed and executed audit may not detect a material misstatement in the financial statements resulting from fraud? Audit procedures that are effective for detecting an unintentional misstatement may be ineffective for an intentional misstatement that is concealed through collusion. Prior to, or in conjunction with, the information-gathering procedures for an audit, audit team members should discuss the potential for material misstatement due to fraud. Which of the following best characterizes the mindset that the audit team should maintain during this discussion? Questioning The following questions concern the audit risk model. Choose the best response. 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 inherent risk. As the acceptable level of detection risk decreases, the auditor may do one or more of the following except change the assurances provided by audit procedures to a lower level. Inherent risk and control risk differ from planned detection risk in that they exist independently of the financial statement audit. The following questions deal with audit risk and evidence. Choose the best response. Which of the following does not increase the need for sufficient appropriate audit evidence? A decrease in the assessed inherent risk As lower acceptable levels of both audit risk and materiality are established, the auditor should plan more work on individual accounts to find smaller misstatements. Based on evidence gathered and evaluated, an auditor decides to increase the assessed level of control risk from that originally planned. To achieve an overall audit risk level that is substantially the same as the planned audit risk level, the auditor could decrease detection risk. The following questions concern auditor responsibilities related to the assessment of risks of material misstatement. Choose the best response. Which of the following procedures would a CPA most likely perform during the planning stage of the audit? Determine areas where there is a higher risk of material misstatement. Dan, CPA, has been engaged to audit Modern Home, a manufacturing company that specializes in furniture. Which of the following matters related to the year under audit would most likely result in an increase of inherent risk? Modern Home recently engaged in a complex derivative transaction. After making a preliminary assessment of the risk of material misstatement during planning and beginning to apply audit procedures, an auditor determines that this risk is actually higher than anticipated. Which would be the most likely effect of this finding on the auditor's desired level of detection risk and the overall level of audit risk, as compared to the levels originally planned? Auditor's Desired Level of Detection Risk Overall Level of Audit Risk Decrease Same There are eight parts of the planning phase of an audit. Which parts involve the evaluation of risk? (Select all that apply.) Identify significant risks due to fraud or error Assess inherent risk Understand internal control and assess control risk