Louwers3eChap003solutions - Chapter 03 - Management Fraud...

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Unformatted text preview: Chapter 03 - Management Fraud and Audit Risk CHAPTER 3 Management Fraud and Audit Risk SOLUTIONS FOR MULTIPLE-CHOICE QUESTIONS 3.20 a. Incorrect. Inherent risk is one component of the risk of material misstatement (the correct answer). b. Incorrect. Control risk is one component of the risk of material misstatement (the correct answer). c. Incorrect. Detection risk is the likelihood that the auditors will not detect misstatements that may have entered the accounting system and not been detected or corrected by the clients internal controls. d. Correct. This is the definition of the risk of material misstatement. 3.21 a. Correct. The risk of material misstatement is composed of inherent risk and control risk. 3-1 Chapter 03 - Management Fraud and Audit Risk 3.22 a. Correct. Management is responsible for making the estimates in the first place, just as management is primarily responsible for all the financial statement elements. b. Incorrect. Auditors need to determine the reasonableness of estimates. c. Incorrect. Auditors need to determine estimates are presented in conformity with GAAP. d. Incorrect. Auditors need to determine whether estimates are adequately disclosed in the financial statements. 3.23 a. Incorrect. Independent auditors are supposed to understand the nature of errors and frauds. b. Incorrect. Independent auditors are supposed to assess the risk of occurrence of errors and frauds. c. Incorrect. Independent auditors are supposed to design audits to provide reasonable assurance of detecting errors and frauds. d. Correct. Independent auditors are not required to report all finding of errors and frauds to police authorities. 3.24 a. Incorrect. This is the risk of giving an inappropriate opinion. b. Incorrect. This is the risk of misstatements entering the accounting system. c. Incorrect. This is the risk that the clients internal control will not detect misstatements that enter. d. Correct. This is the risk that auditors will not detect misstatements. 3.25 a. Incorrect. The business situation creates inherent risk. b. Incorrect. Business risk is the name for the collective risk faced by a company that engages in business. It includes the probability that customers will buy from competitors, that product lines will become obsolete, that taxes will increase, that government contracts will be lost, or that employees will go on strike. c. Incorrect. Control risk is a function of managements design and operation of its internal controls. d. Correct. Auditors are responsible for performing the evidence-gathering procedures that manage and control detection risk. 3.26 b. Correct. DR = AR/ (IRxCR) = 0.05/0.50 = 0.10 3-2 Chapter 03 - Management Fraud and Audit Risk 3.27 a. Incorrect. An audit program does not specify audit standards. All the GAAS are relevant in all audits....
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Louwers3eChap003solutions - Chapter 03 - Management Fraud...

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