#3 Planning Activities 2 - Risk, Materiality, Analysis and Fraud Flashcards
What does Performance Materiality mean?
The amount(s) set by the auditor at less than Materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds Materiality for the financial statements as a whole.
What is meant by the term tolerable misstatement?
The application of Performance Materiality to a particular sampling procedure or application.
What 4 matters should be documented with respect to Materiality considerations?
- Materiality for the financial statements as a whole
- Materiality level(s) for applicable transactions, account balances, or disclosurs
- Performance Materiality
- Any revision of those considerations during the audit Engagement
What is the basic meaning of the concept of materiality?
An understanding of what is important
The terms planning stage Materiality and evaluation stage Materiality in prior Auditing Standards has been replaced by what single concept in the clarified Auditing standards
Performance Materiality
List the variables of planned audit procedures taht can be adjusted to change detection Risk
- Nature
- Timing
- Extent of substantive testing
Define inherent risk
The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures
What risk is within the auditor’s control?
Detection Risk
Define Risk of Material Misstatement
The Risk that the financial statements contain one or more material misstatements prior to the audit. RMM = IR x CR
Define Control Risk
The probability that a material misstatement, that occurred in the first place, wouldn’t be detected by applicable internal controls.
Define audit risk
The probability that the auditor fails to modify the opinion on financial statements that contain a material misstatement
AR= IR x CR c DR
Define Detection risk
The probability that a material misstatement that wasn’t prevented or detected by internal control, wasn’t detected by the auditors substantive audit procedures
What is the purpose of analytical procedures in the overall review?
To verify the conclusions reached in the audit.
List the 4 factors that affect the efficiency and effectiveness of analytical procedures for substantive purposes.
- Nature of Assertion
- Plausibility and predictability of relationship
- Availability and reliability of data
- Precision of expectation
What matters must be documented in connection with analytical procedures?
- The auditor’s expectation and the factors considered in developing it
- The results of the comparison of the recorded amounts (or ratios) with the expectations
- Any additional Auditing procedures preformed to investigate significant differences identified by that comparison
Define Analytical Procedures
Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.
What is the purpose of analytical procedures in audit planning?
To aid in understanding client activities and in targeting risky areas where material misstatements are more likely to occur.
What 3 purposes might analytical procedures serve?
- Required during planning
- May be used as substantive evidence (not required)
- Required during final review
What are three categories of fraud-related risk factors that should be considered by the auditor?
Incentives/Pressures (the motivation for committing fraud)
Opportunities
List the two types of financial statement related frauds
- Fraudulent Financial Reporting
2. Misappropriation of assets
Identify the auditors responsibility for detecting fraud in a financial statement audit.
- Auditor’s must design audit to provide reasonable assurance of detecting material misstatements whether due to fraud or error
- Auditor’s are required to specifically assess the Risk of Material Misstatement due to fraud
- Auditor’s must document the assessment of the Risk of material misstatement due to fraud and the resulting responses associated with any risk factors identified
What is the definition of fraud that is relevant to the auditor?
An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception that results in a misstatement in the financial statements.
When might an auditor have a duty to inform others outside of the audited entity of fraud-related matters.
- In response to a valid subpoena
- To comply with applicable legal and regulatory requirements
- To respond appropriately to successor auditor’s inquires when the former client has given permission to the predecessor
- To report fraud to the applicable funding agency under the requirements of government Auditing Standards.
What are the auditor’s responsibilities to communicate fraud identified by the auditor.
- If the fraud isn’t material, the auditor should inform the appropriate level of management.
- If the fraud is material (or if senior management is involved, even if not material), the auditor should info those charged with governance.
Who should be informed when fraud has occurred that is material (whether or not senior management is involved in the fraud).
The auditor should inform those charged with governance
Who should be informed when the auditor has identified fraud, but that fraud isn’t material and doesn’t involve senior management?
The appropriate level of management should be notified(defined to be at least one level above the level where the fraud occurred)
What is the required form of the auditor’s communications about fraud-related issues?
May be either written or oral, but should be timely.
