2.-3. Risk-oriented Audit Planning Flashcards
Acceptable audit risk
Measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued
Content of the engagement letter
– Engagement’s objectives and information that the auditor cannot guarantee that all acts of fraud will be discovered – Responsibilities of the auditor and management – Identification of the financial reporting framework used – Reference to the expected form and content of the audit report – Engagement’s limitations – Agreement to provide other services, e.g., management consulting – Restrictions to be imposed on the auditor’s work, e.g., deadlines for completing the audit – Agreement on fees
Control risk??
The control risk (CR) measures the auditor’s assessment of the risk that a material misstatement could occur in an assertion and not be prevented or detected on a timely basis by the client’s internal controls. Control risks are understood as risks that arise from weaknesses or failures of internal control methods
Detection risk?
The detection risk (DR) is the likelihood that audit evidence for a segment will fail to detect misstatements exceeding the tolerable misstatement
Different Purposes of Analytical Procedures in Different Phases of the Audit Process
Inherent risk
Measure of the auditor’s assessment of the likelihood that there are material misstatements in an account balance before considering the effectiveness of internal control
Reasons for Audit planning
Three reasons for planning:
– enable the auditor to obtain sufficient appropriate
evidence for the circumstances to minimize legal liability
and maintain a good reputation
– help to keep audit costs reasonable
– avoid misunderstandings with the client, e.g., scope of the service
Steps in applying materiality
- Set Materiality for the fin stat as a whole
- Determine Performance Materiality
- Estimate total misstatement in each segment
- Estimate the combined misstatement
- Compare actual and target state
if 4. > 1. the financial statement cannot be accepted
there are 3 types of substantive procedures
• Substantive tests of transactions: determine whether transaction-related audit objectives are satisfied
• Analytical procedures: comparisons of recorded amounts to expectations developed by the auditor
• Tests of details of balances
Focus on the monetary correctness of the ending general ledger balances for balances sheet and income statement accounts
Types of test of controls
• Types of evidence of manual and automated tests of controls
- Make inquiries of appropriate client personnel
- Examine documents, records, and reports
- Observe control-related activities
- Reperform client procedures
What is materiality??
The magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.
