Chapter 3 - Chapter 03 Risk Assessment and Materiality...

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Chapter 03 - Risk Assessment and Materiality 3-1 CHAPTER 3 RISK ASSESSMENT AND MATERIALITY Answers to Multiple-Choice Questions 3-13 D 3-18 C 3-14 A 3-19 A 3-15 C 3-20 C 3-16 B 3-21 D 3-17 C 3-22 A Solutions to Problems 3-23 a. Audit risk is the risk that the auditor may unknowingly fail to appropriately modify the auditor's opinion on financial statements that are materially misstated. Materiality is the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement. b. Inherent risk is the susceptibility of an assertion to material misstatement, assuming no related internal controls. Control risk is the risk that material misstatements that could occur will not be prevented, or detected and corrected, by the internal controls. Detection risk is the risk that the auditor will not detect a material misstatement that exists in the financial statements. c. Inherent risk and control risk differ from detection risk in that they exist independently of the audit of financial statements, whereas detection risk relates to the auditor's procedures and can be changed at the auditor's discretion. Detection risk has an inverse relationship to inherent and control risk. d. Materiality is affected by the nature and amount of an item in relation to the nature and amount of items in the financial statements under examination, and the auditor's judgment as influenced by the auditor's perception of the needs of a reasonable person who will rely on the financial statements. A number of qualitative factors also affect materiality. e. The auditor's judgment about materiality for planning purposes may be different from materiality for evaluation purposes because the auditor, when planning an audit, cannot anticipate all of the circumstances that may ultimately influence judgment about materiality in evaluating the audit findings at the completion of the audit. If significantly lower materiality levels become appropriate in evaluating the audit findings, the auditor should reevaluate the sufficiency of the audit procedures already performed.
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Chapter 03 - Risk Assessment and Materiality 3-2 3-24 Client No. Detection Risk 1 25% 2 10% 3 67% 4 25% 3-25 Client No. Detection Risk 1 Low to Moderate 2 Low 3 Moderate to High 4 Low 3-26 a. A public offering would increase the auditor’s exposure to third party litigation and would, therefore, reduce acceptable audit risk relative to a private company audit client. b. Bankruptcy increases the auditor’s reputation and litigation risk and would, therefore, reduce acceptable audit risk relative to a private company audit client. c.
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This note was uploaded on 10/16/2011 for the course AIM 6334 taught by Professor Chrits during the Spring '11 term at University of Texas.

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Chapter 3 - Chapter 03 Risk Assessment and Materiality...

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