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ACC450_MC_Solutions_Chpt3

ACC450_MC_Solutions_Chpt3 - Chapter 3 SOLUTIONS FOR...

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Chapter 3: 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 client’s 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. 3.22 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 client’s 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.
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c. Incorrect. Control risk is a function of management’s design and operation of its internal  controls.
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