Business risk is an inherent risk at the financial statement level
Part I: Multiple Choice and True/ False Questions
- T, F. Business risk is an inherent risk at the financial statement level that cannot be controlled either by control risk or detection risk procedures.
- T, F. Audit risk model attempts to provide the auditor the relationships between inherent risk, control risk, detection risk, and audit risk.
- T, F. Misstatement is a material error whether intentional or unintentional that might exist in a transaction or account balances that might be carried through the financial statements.
- Which of the following characteristics would lead the auditor to assess inherent risk at a higher level for financial reporting at the financial statement level?
- The account balance represents an asset that is relatively easily stolen.
- The controls over the account balances are weak.
- The company has a history of exactly meeting analyst estimates.
- The company is in an industry that is mature and declining.
- Risk is a concept used to express:
- Uncertainty about an event or a transaction
- An outcome about an event or transaction
- An outcome and its effect on organizational performance
- All of the above
- None of the above.
- Audit sampling is the process of collecting a representative sample that is:
- Expected to represent a defined population of interest
- Aimed at making an inference about population following the results of analysis of the sample.
- Limited to auditing procedure
- A & B above
- None of the above
- Generalized Audit Software are designed to facilitate audit function in:
- Identifying specific risk areas;
- Processing large data and also writing data;
- Stratification of data;
- Detecting gaps in data
- All of the above.
- T, F. Generalized Audit Software are software programs designed by programs for adaptation by auditors to meet their specific needs.
- T, F. Sampling risk cannot be totally controlled but can be managed through large sample size.
- T, F. Attribute sampling is the most preferred sampling method used by auditors especially with respect to account balances and transactions.
- T, F. Data analytics has made sampling and professional judgment with respect to sampling obsolete.
- T, F. An auditor should provide an opinion on the financial statements only if the opinion indicates that the financial statements are fairly stated in all material respects.
- T, F. Standards on audit reporting are currently in a state of change because both PCAOB and IAASB have issued proposed standards that could fundamentally change auditor reporting in the near future.
- T, F. When the financial statements being audited contain justified departure from GAAP, the auditor can choose between an unqualified and qualified opinion.
- T, F. When an auditor lacks independence, the auditor can choose between an adverse opinion and a disclaimer opinion.
PART II: SHORT CASES
- You are an auditor of a multi-national company, MNO CORPORATION, with Head Quarters in New York City, USA. The Company is in Oil and Gas Prospecting and Refining Industry. Your audit reveals that their books were not well kept and their oil fields were in deep waters of The Atlantic Ocean. You tried to verify these oilfields but the Company failed to provide support. When you examined their Balance Sheet, they failed to indicate their oil reserves and their locations. In addition, their financial statements were not presented in accordance with Accounting Standards for the UPSTREAM and DOWNSTREAM GAAP Standards.
Provide the opinion Section of the Auditor’s report for use by a bank trying to loan MNO Company the sum of $800m.
- What type of audit opinion will you provide and why?
- Provide a Draft Sample of your Audit Opinion below. Opinion should not exceed 8 sentences.
2. Smith and Smith are Certified Public Accountants who are in love with statistical analysis for audit sampling because of its objectivity and precision. They made an estimation of expected population deviation of their client’s accounts receivable to be 2.1% . However, they seem to have a rough idea that the sample is representative of the population and that its deviation approximates that of the population deviation.
They decided to set their sample deviation parameters at + 3 or – 3%
- What will be the sample risk deviation tolerable at the lowest limit level for your audit? The total Accounts Receivable is $500,000.00. This is the assertion by management.
- What will be the sample risk deviation that is tolerable at the highest level?
- Audit risk = Inherent risk X Control Risk X Detective Risk . Complete the Boxes provided below and select the case which the auditor will perform the greatest amount of substantive audit work.
Case 1 Case 2 Case 3 Case 4
Inherent Risk 40% 50% 80% 100%
Control Risk 100% 100% 70% 100%
Audit Risk 5% 5% 1% 1%
Detection Risk —– —- —– —–
Which case should the auditor do the greatest amount of substantive work. Show computation and fill the blank spaces.
PART III: ESSAY Questions
- List but do not discuss the components of a standard unqualified audit report.
- Why is sufficiency in quantity and quality of evidence necessary in the formulation of an audit opinion.
- Briefly discuss and be specific.
- When auditing a University, name three key areas that you should focus on to ensure that no material misstatements or frauds exist in its financial statements. Briefly discuss your three choices.
- How would the knowledge of the use of DATA ANALYTICS help you in avoiding the risks of sampling and misstatements but not inherent risks of accounts receivables? Briefly explain.
- Auditors have always relied on statistical sampling in order to determine the confidence level they need on attesting to the assertions made by management on their financial statements.
Define the following statistical terms in relation to testing for controls:
- Tolerable rate of deviation rate
- Random Sampling
- Attribute or cluster sampling size
- Non-sampling technique.