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Definition
| Many organizations purchase _____ _____ to cover employees handling cash or other negotiable assets |
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| _____ ______ are a form of insurance in which a bonding company agrees to reimburse an employer, within limits, for losses attributable to theft or embezzlement by bonded employees. |
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Definition
| The risk of material misstatement can be separated into two components: ____ risk and ____ risk |
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Term
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Definition
| ____ ____ is the possibility of material misstatement of an assertion before considering the client's internal control |
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Term
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Definition
| Factors that affect _____ risk relate to either the nature of the client and its environment or the nature of the particular financial statement element |
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Term
1) Going Concern problems
2) Substantial turnover, questionable reputation, or inadequate accounting skills of management |
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Definition
| Give two examples of business characteristics that indicate high inherent risk |
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Definition
| The business characteristics below are indicative of ____ ____ risk: 1) Inconsistent profitability of the client relative to other firms in the industry 2) Operating results that are highly sensitive to economic factors 3) Going Concern problems 4) Large known and likely misstatements detected in prior audits 5) Substantial turnover, questionable reputation, or inadequate accounting skills of management |
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Term
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Definition
| ____ 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 |
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Term
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Definition
| ____ risk is the risk that the auditors will fail to detect a material misstatement that exists in a relevant assertion |
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Definition
| _____ risk is a function of the effectiveness of the audit procedures and their application by the auditors |
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Term
1) Tests of details of balances, transactions, and disclosures
2) Substantive analytical procedures |
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Definition
| Substantive procedures of two general types are performed during the course of an audit. What are they? |
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Term
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Definition
| The ____ the risk of material misstatement, the ____ the detection risk that can be accepted by the auditors |
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Term
AR = IR X CR X DR
AR = .50 X .40 X .20
AR = .04
The auditors face a 4% audit risk that material misstatement has occurred and has slipped through both the client's controls and the auditors' procedures |
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Definition
| Assume that the auditors have assessed inherent risk for a particular assertion at 50% and control risk at 40%. In addition, they have performed audit procedures that they believe have a 20% risk of failing to detect a material misstatement in the assertion. Calculate the audit risk. |
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Term
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Definition
| If auditors wish to reduce the level of detection risk, they need to obtain additional _____ _____ |
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Term
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Definition
| If the auditors believe that inherent risk is _____ for an important area and internal control is _____, they will assess the risk of material misstatement as high |
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Term
| Allowance for sampling risk |
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Definition
| the amount of the range (+ or -) within which the true value of the population characteristic is likely to lie. For attributes sampling (measuring a deviation rate), the allowance is expressed in percentage terms. For variables sampling (estimating a numerical amount), the allowance is expressed in dollars or other units. |
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Definition
| the risk that the auditor will conclude that the F/S are not materially misstated when in fact they are |
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| the complement of the risk of assessing control risk too low |
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Term
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Definition
| if RACRTL = 5%, confidence level = |
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Definition
| the risk that the client’s internal controls will allow a material misstatement to occur and go undetected |
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Definition
| the wider the allowance for sampling risk, the more confident we can be that the true population characteristic lies within it, but the less precise our conclusion |
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| Risk of assessing control risk too low |
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Definition
| the risk that the sample results will cause the auditors to assess control risk at a lower level than is warranted based on the actual level of effectiveness of the control |
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Term
| Risk of incorrect acceptance (beta risk) |
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Definition
| the risk that, based on conclusions from a sample, the auditor will conclude that a population is NOT materially misstated when in fact it is |
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Definition
| the difference between the actual rate or amount in the population and the rate or amount indicated by the sample |
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Definition
| the risk that the auditor’s conclusion based on the sample will be different than the conclusion that would have been reached had the entire population been tested |
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Term
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Definition
| The ____ ____ ____ = sample deviation rate + allowance for sampling risk |
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