Audit and Assurance Practice Exam

Which of the following contributes to the auditor's assessment of risks of material misstatement?

1. Client's internal audit results.

2. Nature and timing of significant unusual transactions.

3. The organizational structure of the client.

4. Auditor's testing methodology.

The correct answer is: Nature and timing of significant unusual transactions.

The assessment of risks of material misstatement by auditors is heavily influenced by the nature and timing of significant unusual transactions. This is because unusual transactions often indicate areas where there may be higher risks of errors or fraud. Any transactions that are not typical for the client can signal a need for closer scrutiny, as they may be more prone to misstatement due to their complexity, the judgment required in accounting for them, or potential management bias. Auditors focus specifically on these transactions as they can represent significant variations from the ordinary course of business. By analyzing these unusual transactions, auditors can identify potential risk factors that might not be apparent from more routine transactions, thereby allowing them to better tailor their audit procedures to address those risks specifically. While the other factors, such as the client's internal audit results, the organizational structure, and the auditor's testing methodology, may play a role in the overall audit process, they do not directly contribute to the risk assessment in the same significant manner as the analysis of unusual transactions. Understanding these transactions provides a critical insight into where the auditor should direct their attention and resources to mitigate the risk of material misstatements.