Auditing Homework - Chapter 5-6

Auditing Homework - Chapter 5-6 - Auditing Chapter 5...

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Auditing Chapter 5 Homework 5-1 Describe the relationship between detection risk and audit risk . Audit risk is the risk that the auditors may unknowingly fail to appropriately modify their opinion on financial statements that are materially misstated. The quantity of audit evidence needed is affected both by the risk of misstatement (the greater the risk, the more audit evidence required) and also by the quality of the audit evidence (the lower the quality, the more evidence required.). Detection risk is the risk that the auditors will fail to detect a material misstatement that exists in a relevant assertion when in fact one does exist. 5-2 Identify and describe the two components of the risk of material misstatement ? Inherent risk is the possibility of material misstatement of an assertion before considering the client’s internal control. Business characteristics of the client and its environment affect the inherent risk of the audit as a whole. Control risk is the risk that a material misstatement could occur in a relevant assertion and not be prevented or detected on a timely basis by the client’s internal control. Both inherent risk and control risk exist independently of the audit of financial statements. 5-10 When in the course of an audit might the auditor find it useful to apply analytical procedures? I would think that anytime during the course of the audit the auditors would find it very useful to apply analytical procedures ranging from a simple analytical procedure to compare revenue and expenses amounts for the current year to those of prior periods, to more sophisticated analytical procedures involving extensive computations. Substantive analytical procedures often provide evidence about account balances, transactions, and disclosures through analyzing relationships among data. Analytical procedures are also performed to assist the auditor in risk assessment and as an overall review of the financial information near completion of the audit. 5-12 What are the major purposes of obtaining representation letters from audit clients ? One purpose is to remind the client officers of their primary and personal responsibility for the financial statements. Another purpose is to document in the audit working papers the client’s responses to the significant questions asked by the auditors during the engagement. Also, a representative by management may be the only evidence available with respect to the management’s future intentions. 5-16 When auditing a client’s asset that is valued at fair value, would the auditors expect that asset to be valued at the price to purchase the asset as of the measurement date, or the price that would be received to sell it? Explain . Fair value is defined to be the price that would be received to sell an asset, or the amount that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date.
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This note was uploaded on 07/27/2011 for the course ACCT 102 taught by Professor Huxhold during the Spring '11 term at UCSD.

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Auditing Homework - Chapter 5-6 - Auditing Chapter 5...

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