#3 Planning Activities 2 - Risk, Materiality, Analysis and Fraud

Question 1

What does Performance Materiality mean?

Answer 1

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.

Question 2

What is meant by the term tolerable misstatement?

Answer 2

The application of Performance Materiality to a particular sampling procedure or application.

Question 3

What 4 matters should be documented with respect to Materiality considerations?

Answer 3

1. Materiality for the financial statements as a whole
2. Materiality level(s) for applicable transactions, account balances, or disclosurs
3. Performance Materiality
4. Any revision of those considerations during the audit Engagement

Question 4

What is the basic meaning of the concept of materiality?

Answer 4

An understanding of what is important

Question 5

The terms planning stage Materiality and evaluation stage Materiality in prior Auditing Standards has been replaced by what single concept in the clarified Auditing standards

Answer 5

Performance Materiality

Question 6

List the variables of planned audit procedures taht can be adjusted to change detection Risk

Answer 6

1. Nature
2. Timing
3. Extent of substantive testing

Question 7

Define inherent risk

Answer 7

The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures

Question 8

What risk is within the auditor’s control?

Answer 8

Detection Risk

Question 9

Define Risk of Material Misstatement

Answer 9

The Risk that the financial statements contain one or more material misstatements prior to the audit. RMM = IR x CR

Question 10

Define Control Risk

Answer 10

The probability that a material misstatement, that occurred in the first place, wouldn’t be detected by applicable internal controls.

Question 11

Define audit risk

Answer 11

The probability that the auditor fails to modify the opinion on financial statements that contain a material misstatement
AR= IR x CR c DR

Question 12

Define Detection risk

Answer 12

The probability that a material misstatement that wasn’t prevented or detected by internal control, wasn’t detected by the auditors substantive audit procedures

Question 13

What is the purpose of analytical procedures in the overall review?

Answer 13

To verify the conclusions reached in the audit.

Question 14

List the 4 factors that affect the efficiency and effectiveness of analytical procedures for substantive purposes.

Answer 14

1. Nature of Assertion
2. Plausibility and predictability of relationship
3. Availability and reliability of data
4. Precision of expectation

Question 15

What matters must be documented in connection with analytical procedures?

Answer 15

1. The auditor’s expectation and the factors considered in developing it
2. The results of the comparison of the recorded amounts (or ratios) with the expectations
3. Any additional Auditing procedures preformed to investigate significant differences identified by that comparison

Question 16

Define Analytical Procedures

Answer 16

Evaluations of financial information through analysis of plausible relationships among both financial and nonfinancial data.

Question 17

What is the purpose of analytical procedures in audit planning?

Answer 17

To aid in understanding client activities and in targeting risky areas where material misstatements are more likely to occur.

Question 18

What 3 purposes might analytical procedures serve?

Answer 18

1. Required during planning
2. May be used as substantive evidence (not required)
3. Required during final review

Question 19

What are three categories of fraud-related risk factors that should be considered by the auditor?

Answer 19

Incentives/Pressures (the motivation for committing fraud)

Opportunities

Question 20

List the two types of financial statement related frauds

Answer 20

1. Fraudulent Financial Reporting

2. Misappropriation of assets

Question 21

Identify the auditors responsibility for detecting fraud in a financial statement audit.

Answer 21

1. Auditor’s must design audit to provide reasonable assurance of detecting material misstatements whether due to fraud or error
2. Auditor’s are required to specifically assess the Risk of Material Misstatement due to fraud
3. 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

Question 22

What is the definition of fraud that is relevant to the auditor?

Answer 22

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.

Question 23

When might an auditor have a duty to inform others outside of the audited entity of fraud-related matters.

Answer 23

1. In response to a valid subpoena
2. To comply with applicable legal and regulatory requirements
3. To respond appropriately to successor auditor’s inquires when the former client has given permission to the predecessor
4. To report fraud to the applicable funding agency under the requirements of government Auditing Standards.

Question 24

What are the auditor’s responsibilities to communicate fraud identified by the auditor.

Answer 24

1. If the fraud isn’t material, the auditor should inform the appropriate level of management.
2. If the fraud is material (or if senior management is involved, even if not material), the auditor should info those charged with governance.

Question 25

Who should be informed when fraud has occurred that is material (whether or not senior management is involved in the fraud).

Answer 25

The auditor should inform those charged with governance

Question 26

Who should be informed when the auditor has identified fraud, but that fraud isn’t material and doesn’t involve senior management?

Answer 26

The appropriate level of management should be notified(defined to be at least one level above the level where the fraud occurred)

Question 27

What is the required form of the auditor’s communications about fraud-related issues?

Answer 27

May be either written or oral, but should be timely.