4.1 Audit Risk Flashcards
What is risk of material misstatement
The risk that the financial statements are materially misstated prior to audit
Components of risk of material misstatement
Inherent risk and control risk
Describe inherent risk
The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related control
Describe control risk
Risk that a misstatement that could occur in a assertion about a class of transaction, account balance or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control
Relationship between control risk and efficiency of internal control of an entity
Inverse
Conditions under which the auditor is required to test the operating effectiveness of controls in determining the nature, timing and extent of substantive procedures to be performed
Auditor assesses control risk as rely or not rely on controls
Control risk assessment when control deficiencies are identified
Levels at which risk of material misstatement exist
Overall financial statement level
Assertion level for classes of transactions, account balances and disclosures
Define misstatements
It is the difference between the amount, classification, presentation or disclosure of a reported financial statement item and the amount, classification, presentation or disclosure that is required for the item to be in accordance with the applicable financial reporting framework
Not included in audit risk
Risk that the auditor might express an opinion that the financial statements are materially misstated when they are not - ordinarily insignificant
Not refer to the auditor’s business risk such as loss of litigation, adverse publicity and other events arising in connection with the audit of financial statements
Assessment of risk
It is a matter of professional judgement not a matter capable of precise measurement
How the auditor and SA differs in assessment of risk of material misstatement
SA refer to a combined assessment of risk of material misstatement
Auditor may make separate or combined assessment of inherent and control risk depending upon preferred audit methodologies or techniques and practical consideration
Assessment of risk of material misstatement expressed in
Quantitative terms or non quantitative terms
Risk of material misstatement =
Inherent risk x Control risk
Audit risk =
Risk of material misstatement x Detection risk; or
Inherent risk x Control risk x Detection risk
Define detection risk
Risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements
