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level: Audit Risk

Questions and Answers List

level questions: Audit Risk

Question	Answer
Define 'Audit Risk'.	The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk.” (Source—AU 200, Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with [GAAS]. )
The risk of material misstatement (RMM) is defined as: “The risk that the financial statements are materially misstated prior to the audit.” RMM exists at what two (2) LEVELS:	1. Overall Financial Statement level 2. Assertion level for classes of transactions, account balances, and disclosures
The auditor assesses RMM at the assertion level for the purpose of determining the nature, timing, and extent of further audit procedures to obtain sufficient appropriate audit evidence. RMM at the assertion level consists of what two (2) COMPONENTS:	1. Inherent risk 2. Control risk
At the assertion level, Audit Risk consists of what three (3) component risks:	1. Inherent risk 2. Control risk 3. Detection risk
DR (Detection Risk) can be broken into two components involving the likelihood that the auditor's two basic categories of substantive procedures fail to detect a material misstatement that exists, what are those two categories?	1. Test of Details 2. Substantive Analytical Procedures
What does an increase in Detection Risk represent?	Smaller sample sizes
When Inherent Risk or Control Risk increases, what happens to Detection Risk?	Detection Risk decreases = larger sample sizes