A3 Flashcards
What are the two types of fraud risk?
- Fraudulent financial reporting
2) misappropriation of assets - theft of an entity’s assets
What are three fraud risk factors whose presence indicates a greater possibility of fraud?
1) Incentives / pressures exist when there is a reason to commit fraud
2) Opportunity to commit fraud exists due to a lack of effective controls
3) rationalization / attitude associated with attempting to justify fraudulent behavior
What is management’s responsibility with respect to fraud
Design and implement programs and controls to prevent, detect and deter fraud
What is the auditor’s responsibility related to fraud?>
responsibility to obtain reasonable assurance about whether the financial statements are free of material misstatements, whether due to error or fraud. The auditor must:
1) exercise professional skepticism
2) discuss fraud risk with engagement partners
3) obtain information regarding fraud risk (inquiry, analytical procedures, etc)
4) Identify and assess fraud risk and develop an appropriate response
5) evaluate how audit evidence affects the fraud risk assessment
When analyzing fraud, which four attributes should the auditor consider?
1) type of risk
2) significance of the risk
3) likelihood of the risk
4) pervasiveness of the risk
When there is fraud, what should the auditor do if the fraud is immaterial versus material
immaterial — report to management at least one level about the parties involved
material or involves senior management - report to audit committee or those charged with governance
What are the three types of material misstatement?
1) Factual misstatements
2) judgemental misstatements
3) projected misstatements
What is a factual misstatement?
misstatements about which there is no doubt
what is judgemental misstatements?
management and the auditor have material judgement differences on accounting estimates or the application of accounting policies
What is a projected misstatement?
This represents the auditor’s best estimate of misstatements in populations, by projecting misstatements in an audit sample to the population from which the sample was drawn
What is audit risk
risk that the auditor may unknowingly fail to modify appropriately the opinion on financial statements that are materially misstated
what are the two factors of audit risk
1) risk of material misstatement
2) detection risk
What are factors that would increases inherent risk?
- Technological developments that make a product obsolete
- a lack of working capital
- a decline in overall industry or economy
high - high-volume transactions
- complex transactions
- amounts derived from estimates
What are the two components of the risk of material misstatement?
1) inherent risk
2) control risk
What is inherent risk
The susceptibility of a relevant assertion to a material misstatement assuming that there are no related controls
What is a control risk
The risk that a material misstatement that could occur in a relevant assertions will not be prevented or detected (and corrected) on a timely basis by internal control
What is the audit risk model
AR = RMM x DR
What is the relationship between detection risk to substantive risk
There is an inverse relationship between RMM and DR. As the acceptable level of detection risk increases, teh assurance required from substantive test decreases. As the acceptable level of detection risk decreases, the assurance required from substantive testing must increase
How can an auditor obtain more assurance from substantive procedures
1) changing the nature of substantive tests from a less effective to a more effective procedures (e.g., a direct test toward independent parties outside the entity rather than toward parties or documentation inside the entity)
2) changing the extent of substantive tests (e.g., using larger sample size)
3) changing the timing of substantive tests (e.g., performing substantive tests at year-end rather than at the interim)
What is the relationship between audit risk and materiality?
- audit risk and materiality must be considered together in designing the NET of audit procedures
- Audit risk and materiality must be considered at both the financial statement level and at the individual account balance, transaction class or disclosures item level
- there is an inverse relationship between audit risk and materiality
what are the three ways an auditor should respond to assessed risk?
1) overall response to address risk at the FS level
2) a response at the relevant assertion level
3) a response to significant risk
what is a significant risk
one that requires special audit consideration
What are factors that are indicative of a significant risk
- non-routine, unusual, or complex transactions
- improper revenue recognition
- fraud risk
- significant related party transactions
- accounting estimates or other subjective measurements of financial information
- accounting principles that are subject to different interpretations
- non-compliance with laws and regulations
what are the documentation requirements around the auditor’s assessment of risk?
The auditor should document
- dicsussion among the audit team
- understanding of the entity and its environment, icnluding its internal control
- assessment of the risk of material misstatement
- basis of the risk assessment
- identified risks and related controls evaluated