12) ROMM - Overall Level Flashcards
what happens during the risk assessment?
(still part of the planning stage)
the auditor identifies the ROMM at overall and assertion level
what is the definition of audit risk?
the risk that the auditor expresses an inappropriate audit opinion when the FS are materially misstated
what is the definition of ROMM?
the risk that FS are materially misstated before the start of the audit work
at which levels are ROMM considered?
overall FS level and assertion level
what are the components of audit risk?
ROMM + detection risk
what are the components of ROMM?
inherent risk + control risk
what are the scales for the likelihood of risk?
low, medium, high, significant
what is detection risk?
risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a material misstatement
what can cause detection risk?
- tight audit deadline
- new client we are unfamiliar with
what is inherent risk?
- built-in risk
- the potential of the FS as a whole to have misstatement that could be material (in isolation or aggregate) before controls are considered
what is control risk?
the risk that the controls are not operating effectively
what can give rise to inherent risk?
- fraud
- errors
- going-concern assumption is not appropriate
- non-compliance with laws
what can cause errors in the FS?
- incompetent staff
- reliance on tech
- short-staffing
- having multiple locations
what can give rise to control risk?
- lack of mgmt integrity
- mgmt override of controls
- weaknesses
- poor control environment
why do we determine ROMM?
to determine the nature, timing and extent of audit procedures we need to do
why do we do audit procedures?
to obtain audit evidence
why do we obtain audit evidence?
so we can use it to provide our opinion on the FS
what is the risk-based audit approach?
1) identify and assess ROMM based on understanding the entity and its environment
2) obtain sufficient evidence through designing risk responses
3) form audit opinion
from where can audit evidence be obtained?
- mgmt
- TCWG
- internal auditors
- regulators
what is business risk?
what can go wrong ito business and mgmt objectives for both operational and info integrity risks
which risks are controlled by the auditor?
detection risk
what is the audit risk equation?
AR = IR x DR x CR
what risks can the auditor not control?
ROMM – inherent and control risk
how can auditors reduce detection risk?
- sound audit planning
- performing audit procedures
- proper assignment of personnel
- professional skepticism
