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Question 1
What are the three components of the audit risk model?
Answer: Inherent risk, control risk, and detection risk. Audit risk equals inherent risk multiplied by control risk multiplied by detection risk.
Question 2
If an auditor assesses control risk as HIGH, what must happen to detection risk to hold audit risk constant?
Answer: Detection risk must be set LOWER, requiring the auditor to perform more extensive substantive procedures to compensate.
Question 3
What is the definition of 'inherent risk' in auditing?
Answer: Inherent risk is the susceptibility of an assertion to a material misstatement, assuming there are no related internal controls.
Question 4
What distinguishes a 'significant risk' from other identified risks during an audit?
Answer: A significant risk is an identified and assessed risk of material misstatement that, in the auditor's judgment, requires special audit consideration, often involving fraud or complex transactions.
Question 5
What is 'materiality' as used in audit planning, and who sets it?
Answer: Materiality is the magnitude of an omission or misstatement that could influence the economic decisions of users; the auditor establishes it based on professional judgment during planning.