Question

Describe examples of characteristics of transactions and balances that might cause an auditor to determine that a risk of material misstatement is a significant risk.

Select the THREE characteristics of transactions and balances that might cause an auditor to determine that a risk of material misstatement is a significant risk and then select each​ characteristic's matching description.

Characteristics

Acceptable Audit Risk

Fraud Risk

Matters Requiring Significant judgement

Non Routine Transactions

Routine Transactions

Characteristic	Description

Descriptions

1.	This generally involves concealment and so detecting material misstatements is difficult. As a​ result, when auditors identify a potential risk of material​misstatement, auditing standards require the auditor to consider that risk a significant​ risk, which triggers required responses to those risks.
2.	Transactions that are​ common, either due to size or​ nature, and that are frequent in occurrence. These transactions may increase the risk of material misstatement because they often involve a greater extent of management​intervention, including more reliance on manual versus automated data collection and​ processing, and they can involve complex calculations or unusual accounting principles not subject to effective internal controls due to the nature of their frequency. Related party transactions often reflect these​characteristics, thereby increasing the likelihood they are considered significant risks.
3.	Classes of transactions or account balances that are based on the development of accounting estimates that are subjective or based on assumptions about future events. As a​ result, these types of transactions or balances frequently are identified as significant risks.
4.	Transactions that are​ unusual, either due to size or​ nature, and that are infrequent in occurrence. These transactions may increase the risk of material misstatement because they often involve a greater extent of management​intervention, including more reliance on manual versus automated data collection and​ processing, and they can involve complex calculations or unusual accounting principles not subject to effective internal controls due to the nature of their frequency. Related party transactions often reflect these​characteristics, thereby increasing the likelihood they are considered significant risks.

Answer 1

As per question 3 characteristics has to be selected and matched with the description.

Characteristics

Fraud Risk = Description 1

Matters Requiring Significant judgement = Description 3

Non Routine Transactions = Description 4