1:1 The Audit Process 2 Flashcards
What is the null hypothesis of audit?
Accounts are okay
What is the breakdown of error types in audit?
Clean opinion Modified opinion
Accounts Fine Type 1 error
are ok
Problem Type 2 error fine
Type 2 error is the risk of audit.
What is the Audit risk model?
AR = IR x CR x DR
DR = ARR x TD
What is Audit Risk?
AR - the risk that a clean audit opinion is issued but the statements are materially mis-stated
What is Inherent Risk?
IR - The risk of an account balance being inaccurate irrespective of related internal controls
What is Control Risk?
CR - The risk that an error in the account balance would occur and would not be prevented by the internal control on a timely basis
What is Detection Risk?
DR - The risk that the Auditors substantive procedures do not detect a mis-statement
What is Analytical review risk?
ARR - the risk that material mis-statements slip through analytical review
What is Test of Detail Risk?
TD - The risk that material mis-statements slip through tests of detail
What is Sampling Risk?
SR - the risk that the sample is not representative of the population
What is the normal use of the audit risk model?
DR = AR / (IR x CR)
This means that the auditors determine the level of testing required, given the probabilities of IR and CR and the level of AR accepted
What is the definition of materiality?
The extent to which the true value of a population can vary from the stated book figures before the divergence becomes significant enough to warrant change
Materiality in Audit
Keep a overs and unders schedule
Materiality only applies to substantive testing
What problems does Statistical sampling solve? (2)
Use of samples reduces the chances of detection errors
Helps the audit be more efficient
What are the advantages of statistical sampling? (3)
Imposes a discipline
Sample size is objectively determined
Permits much greater precision in the evaluation of the results of tests based on such a sample
