1.11 Audit Risk Flashcards
What is audit risk
The risk that the Auditor me unknowingly down to appropriately modify the opinion on financial state that are material only missed stated
What are the components of audit risk
Risk of material miss statement
Detection risk
What does risk of material miss statement RMM consist of
Inherent risk and control risk
What is inherent risk
The risk that a material is statement of an assertion will occur in the absence of any internal controls
Cash is an example
What is control risk
Risk that the clients internal control will not detect a material miss statement
What is detection risk
Risk that the audit procedures will incorrectly lead to the conclusion that I material miss statement does not exist when in fact when does
What are the two components of Detection risk
Test of details TD
Substantive analytical procedures risk. AP
With regard to risk when can failure of the audit at her
When to component risk events occur together
What is the formula for audit risk
Audit risk = inherent riskxcontrol riskxdetection risk
AR=[RMM(IR x CR) x DR
AR=(IR X CR) x(TD x AP)
What is the relationship between detection risk and risk of material miss statement
Inverse relationship
Greater RMM the auditor believes exists the less detection risk that can be accepted and vice versa
What is the relationship between reliance and RMM
Reliance down
RMM up
Detection risk down
Substantive test up
Reliance up
RMM down
Detection risk up
Substantive test down
Inherent risk in control risk differ from detection risk in that they exist
Independently of the audit
How can detection risk the altered
By adjusting the nature of timing and extent of substantive procedures
It relates to the auditors procedure
What procedures does an audit of the form with regard to detection risk
Determine acceptable level of audit risk
Assess the risk of material miss statement
Determine the level of detection risk that is necessary to achieve the desired audit risks
How long does an auditor assess the risk of material miss statement
Evaluating inherent risk associated with financial statements
Assess control risk based on the auditors understanding of internal control
How can the components of the audit risk model Be assessed
Quantitative terms such as percentages
Nonquantitative terms such as high medium or low risk
Fraud and errors AU-C 240
The auditors responsibility is to plan in the form the audit to obtain a reasonable shores that new errors or accept broadhead cause the financial statements to be materially mistated
What does a miss statement mean with regard to Fraud and errors
Omission a financial statement element account or item
Financial statement disclosure that’s not presented in accordance to gaAP
Omission of information required to be disclosed in accordance with GAAP
Difference between how an item has been reported in FSU and how it would have been reported under GAAP
Examples of how misstatements can be evaluated quantitatively
Those that affect profitability trends
change losses in the income
Affect segment information
Affect compliance with the legal and contractual requirements
What are the effects of estimates with regard to the risk of material misstatements
Involve the use of estimates subject to human error
are susceptible to manipulation
What are the two types of fraud
Fraudulent financial reporting
Miss appropriation of assets
What is fraud
And intentional acts by one or more individuals that results in a miss statement on the financial statements
What is fraudulent financial reporting
Management fraud or cooking the books
What is misappropriation of assets
Embezzlement of funds
Theft of other assets
Miss use of entity assets
What are the two types of miss statements resulting from errors or frauds
Known miss statements
Likely miss statements
Define known misstatements
Miss statements specifically identified during the audit
Define likely miss statements
Miss statements that have not been specifically identified but are considered likely to exist
What are likely miss statements based on
Audit evidence obtained
Due to difference between management in auditors judgments
Auditors must communicate oh moon and likely miss statements if any material identified during the audit to whom
Appropriate level of management
How should know and likely miss statements be handled by management
Known must be corrected
Likely should be evaluated
What are the three Conditions that are assumed to be present whenever a successful fraud occurs
Reason or motivation
Opportunity
Rationalization
How should knowledge or suspicion of noncompliance with applicable laws and regulations(AU-C 250) be Treated
Communicate to those charges governance all but those that are clearly inconsequential
What is the difference between illegal acts that have a direct effect and an indirect effect
Direct effect are corrected with adjusting entries
Indirect effect generally result in contingencies
