reciew unit 3

  

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Review questions unit 3
1. Comment on the reliability of each of the following examples of audit evidence. Arrange
your answer in the form of a separate paragraph for each item. Explain fully the reasoning
employed in judging the reliability of each item.
a.
b.
c.
d.
Copies of client’s sales invoices.
Auditors’ independent computation of earnings per share.
Paid checks returned with a bank statement.
Response from customer of client addressed to auditors’ office confirming amount owed
to client at balance sheet date.
e. Representation letter signed by controller of client company stating that all liabilities of
which she has knowledge are reflected in the company’s accounts.
2. Audit risk should be considered when planning and performing an audit of financial
statements in accordance with generally accepted auditing standards.
Required:
a.
b.
c.
d.
Define audit risk.
Describe its components of inherent risk, control risk, and detection risk.
Explain the interrelationship among these components.
Which (if any) of these components is completely a function of the sufficiency of the
evidence gathered by the auditors’ procedures? Explain your answer.
Comment on the following: “Since cash is often less than 1 percent of total assets, inherent and
control risk for that account must be low. Accordingly, detection risk should be established at a
high level.”
3. Auditors should plan and perform their audits to provide reasonable assurance of detecting
material misstatements in financial statements, including those resulting from fraud.
Required:
a. Distinguish between fraudulent financial reporting and misappropriation of assets.
b. Describe the three fundamental conditions necessary for the commission of fraud.
Provide an illustration of these three conditions for a case of fraudulent financial
reporting.
c. Describe the three ways in which the auditors may respond to fraud risks in an audit
4. In designing further audit procedures, the auditors should assess the risks of material
misstatement of the financial statements.
Required:
a.
b.
c.
d.
Describe the auditors’ general approach to such risk assessment.
Identify potential responses to financial statement level risks.
Explain what is meant by a significant risk.
Describe how a significant risk should be treated in an audit
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