Describe what is meant by acceptable audit risk. Explain why each of the following statements is true.

What is meant by acceptable audit risk?

A.

Acceptable audit risk is a measure of the auditor's assessment of the susceptibility of an assertion to material misstatement before considering the effectiveness of internal control.

B.

Acceptable audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unmodified opinion has been issued.

C.

Acceptable audit risk is a measure of the risk that audit evidence for a segment will fail to detect misstatements that could be material, should such misstatements exist.

D.

Acceptable audit risk is the risk that the auditor or audit firm will suffer harm because of a client relationship, even though the audit report rendered for the client was correct.

Explain why each of the following statements

are true.Statement

a.

A CPA firm should attempt to achieve the same audit risk for all audit clients when circumstances are similar. Why is this statement true?

A.

A CPA firm should attempt to use reasonable materiality from audit to audit when circumstances are similar. The only reasons for having a different audit risk in these circumstances are the use of considerable judgment on the part of the auditor and difficulties of measuring audit risk.

B.

A CPA firm should attempt to use reasonable uniformity from audit to audit when circumstances are similar. Under no circumstances should a different audit risk be used by the auditor.

C.

A CPA firm should attempt to use reasonable uniformity from audit to audit when circumstances are similar. The only reasons for having a different audit risk in these circumstances are the lack of consistency within the firm, different audit risk preferences for different auditors, and difficulties of measuring audit risk.

D.

A CPA firm should attempt to use reasonable materiality from audit to audit when circumstances are similar. The only reasons for having a different audit risk in these circumstances are the use of considerable judgment on the part of the auditor and the discovery of fraudulent financial reporting during the audit.

Statement

b.

A CPA firm should decrease acceptable audit risk for audit clients when external users rely heavily on the statements. Why is this statement true?

A.

Users who rely heavily upon the financial statements need more reliable information than those who do not place heavy reliance on the financial statements.

B.

A large number of financial statement users increases the likelihood that management might have questionable integrity and conduct their business affairs in a manner that results in conflicts with their stockholders, regulators, and customers.

C.

The more external users rely on the statements, the less likely a CPA firm will get sued by the client.

D.

All of the above are reasons the statement is true.

Statement

c.

A CPA firm should decrease acceptable audit risk for audit clients when engagement risk is high. Why is this statement true?

A.

The auditor is likely to face greatest legal exposure in situations where external users rely heavily upon the statements.

B.

A large number of external users placing heavy reliance on financial statements places a greater burden on the auditors. A great social harm can result if a significant misstatement remains undetected in the financial statements.

C.

A client with questionable integrity might conduct their business affairs in a manner that results in conflicts with their stockholders, regulators, and customers.

D.

All of the above are reasons the statement is true.

Statement

d.

Different CPA firms should attempt to achieve reasonably similar audit risks for clients with similar circumstances. Why is this statement true?

A.

The audit opinion issued by different auditors conveys the same meaning regardless of who signs the report.

B.

Complete assurance of the accuracy of the financial statements is the primary goal of auditors.

C.

All auditors use the same mix of experienced and junior audit staff to complete the audit.

D.

In all audits, auditors want to be certain that the financial statements are not materially misstated.