Auditing 410 Test

Auditing 410 Test - Auditing 410 Test Solutions for Chapter...

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Auditing 410 Test Solutions for Chapter 4 Audit Risk, Business Risk, and Audit Planning Review Questions: 4-1. Business Risk - Those risks that affect the operations and potential outcomes of organizational activities. Engagement Risk - The risk auditors encounter by being associated with a particular client: loss of reputation, inability of the client to pay the auditor, or financial loss because management is not honest and inhibits the audit process. Financial Reporting Risk - Those risks that relate directly to the recording of transactions and the presentation of financial data in an organization’s financial statements; also referred to as the risk of material misstatement. Audit Risk - The risk that the auditor may provide an unqualified opinion on financial statements that are materially misstated. 4. Controls exist to address risks. Therefore, it would be impossible to evaluate the effectiveness of controls without first knowing the risks, or bad outcomes, that the controls are designed to address. 4-10. A “high risk” audit client is one in which the auditor believes that (a) association with the client will have a higher than average potential of material loss to the audit firm; or (b) the company operates in an industry that is considered high risk; or (c) the company’s financial results are such that financial failure is a possibility. High risk audit clients are generally characterized by:
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Management with questionable integrity Inadequate capital Lack of long-run strategic and operational plans Low cost of entry into the market Dependence on a limited product range Dependence on technologies that may quickly become obsolete Instability of future cash flows History of questionable accounting practices Previous inquiries by the SEC or other regulatory agencies Poor financial condition Large market value stock fluctuations An industry characterized by rapid volatility 4-16. Audit Risk is the risk that the auditor may provide an unqualified opinion on financial statements that are materially misstated. The auditor sets their level of audit risk based on a number of factors. A detailed diagram of those factors is included in Exhibit 4.1. Business risk, engagement risk, and financial reporting risk are directly considered when setting audit risk. Once audit risk is set, the auditor will assess control risk, inherent risk, and then determine the level of detection risk, and therefore will, in turn, determine the nature and extent of audit procedures performed. The important thing to emphasize is that audit risk should be minimized and is determined by the auditor in response to the auditor’s assessment of engagement risk. Multiple Choice Questions:
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This note was uploaded on 02/25/2011 for the course ACC 410 taught by Professor Lapointe during the Spring '11 term at NC Wesleyan.

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Auditing 410 Test - Auditing 410 Test Solutions for Chapter...

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