3.2 Flashcards
What is audit risk?
risk that the auditor might not modify the opinion due to material misstatements
What is material misstatement?
-omission or misstatement that changes the judgement of the financials
What are the types of material misstatements?
“-Factual
- Judgemental
- Projected-auditors best estimate of misstatement in populaitions”
What is the audit risk equation
AR=RMMxDR
How does the auditor asses risk of material misstatement?
“1.make a single overall assessment of risk
2.seperately assess inherent risk and control risk”
What is inherent risk?
susceptibility of revelant assertion to material misstatement assuming there are no related controls
What are some transactions for events that have high inherent risk?
“-high volume transactions
- complex calculations
- cash
- tech that renders a product obsolete
- lack of working capital
- decline in economy “
What is control risk?
-material misstatement that could occur in a relevant assertion will not be prevented, detected, corrected
When is control risk high
“-no effective controls revelant to the assertion
- controls not operating properly
- not be efficient to test operating effectiveness of controls “
What is detection risk?
risk auditor will not detect a material misstatement
Explain the relationship between RMM & DR?
inverse relationship
Explain the relationship between detection risk and substantive procedures
when detection risk is low they should up assurance from substantive procedures
What should auditor do to ensure a low level of detection risk
“-change extent and timing of substantive tests
-change nature of substantive tests”
Steps to assess risk during the planning stage of the engagement
“1.determind audit risk-risk assumed to be low
- assess inherent risk- auditors understanding of the client
- assess control risk-understanding the design and implementation of internal controls and effectiveness
- determine detection risk”
Acceptable level of detection risk is inversely related to?
assurance provided by substantive tests
