A3 - Risk, Evidence, and Sampling Flashcards
What happens when there is Fraud commited by an officer?
Fraud involving an officer should be reported to governance.
What happens if, after communicating the Fraud of an officer to governance, governance does not do anything about it?
The auditor should consider withdrawing from the engagement.
What is Fraud?
Fraud is an intentional act that results in a material misstatement in financial statements that are the subject of an audit.
What is Error?
Error is an unintentional misapplication of accounting principles relating to amounts, classification, manner of presentation, or disclosure.
What is the primary objective of the fraud brainstorming session?
The primary objective of the fraud brainstorming session is to assess the potential for material misstatement due to fraud.
What is an integrated audit?
An audit where two opinions are expressed:
- Opinion on the fairness of FS.
- Opinion on the operating effectiveness of controls.
When should the auditor consider the assessment of the risk of material statement?
During every stage of the audit.
What should the auditor consider during the overal review stage of the audit?
The auditor should consider whether the resuls of any of the audit procedures affect the assessment of the risk of material misstatement due to fraud.
What happens when an auditor expresses an unmodified opinion on FS that are materially misstated due to fraud?
Since fraud is so hard to detect, the auditor will be considered to have met his or her responsibility provided the audit was planned and performed appropriately, including a specific assessment of the rist of material misstatement due to fraud.
What are the three risk factors?
POA!
- Pressures/Incentives.
- Opportunity.
- Attitude/Rationalization.
What happens when the three risk factotrs are present in an audit?
The risk of material misstatement is greatest.
What happens when there is only one but less than three risk factors present in an audit?
One is enough to cause a risk of material misstatement due to fraud.
What is the most important factor concerning an auditor’s responsibility to detect errors and fraud?
The risk that mistakes, falsifications, and omissions may cause the FS to contain material misstatements.
What are the procedures that an auditor should follow to identify the risks of material misstatement due to fraud?
- Inquire of entity personnel regarding their views on fraud risk.
- Consider the results of Analytical Procedures.
- Evaluate Fraud Risk Factors.
What are the inquiries an auditor should make to personnel regarding their views on fraud risk?
- Identified or suspected instances of fraud.
- The process for identifying and responding to fraud riskm and controls established to address fraud risk.
- Communication of Management’s code of ethics.
- Whether management has communicated to governance about internal controls.
What are the conditions noted during fieldwork that may affect the auditor’s assessment of fraud risk?
- Discrepancies in the accounting records.
- Conflicting or missing evidential matter.
- Problematic relationship btwn auditor and mgmt.
- Objections by mgmt to the auditor meeting privately with the audit committee.
- Accounting policies that are inconsistent with industry practices.
- Frequent weird changes in accounting estimates.
- Tolerance of violations of the company’s code of conduct.
What are the 4 attributes of risk?
- Type of risk = Fraud in FS or misappropriation of assets?
- Significance of the risk = Material misstatement?
- Likelihood of the risk = Chances for fraud to happen.
- Pervasiveness of the risk = Does it affect FS as a whole or only some accounts, transactions etc?
What are the factors that should be considered when evaluating overall fraud risk?
- Whether the 3 fraud risk factors are present.
- Size, complexity, and ownership characteristics of the entity.
- Susceptibility of items to manipulation.
- How fraud can be perpetrated or concealed.
What should an auditor do when the audit evidence is not reliable?
The auditor should reevaluate the risk of fraud and design alternate tests for the related transactions.
What is the formula for Audit Risk?
Audit Risk = Risk of Material Misstatement * Detection Risk
What is the formula for Risk of Material Misstatement (RMM)?
RMM = Inherent Risk * Control Risk
What is Inherent Risk?
The susceptibility of a relevant assertion to a material misstatement, assuming that there are no related controls.
When is Inherent Risk high?
When an account is more likely to contain a material misstatement.
What are the assertions that have a high inherent risk?
- Complex calculations.
- Estimates.
- Cash
- High-volume transactions.