AUD 3 - Audit Risk

Question 1

What is audit risk?

Answer 1

Auditor may fail to appropriately modify the opinion on financial statements that are materially misstated

E.g. Auditor issues an unqualified/unmodified opinion on materially misstated financial statements

Question 2

What are material misstatements?

Answer 2

Misstatements can result from errors, which are unintentional, or fraud, which is intentional.

Misstatements include:

1) Inaccuracies in the collection or processing of data
2) Departures from GAAP
3) Omissions
4) Incorrect estimates or judgments
5) Inappropriate selection or application of accounting policies

Question 3

Define the audit risk model and how to calculate?

Answer 3

The risk that the auditor will issue the WRONG opinon

AR (Audit risk) = RMM (Risk of material misstatement (IR x CR) (Inherent risk x control risk) X DR (Detection risk)

Question 4

Define risk of material misstatement?

Answer 4

Exists independent of financial statement audit (this is the client’s system). We CANNOT control

• We assess the client’s risk

Question 5

Define detection risk?

Answer 5

We can CONTROL how much work we do (nature, extent, and timing). We judge the work we do by our assessment of management’s system

• Auditor misses the misstake (error, fraud) and gives the wrong opinion

Question 6

Define inherent risk?

Answer 6

risk posed by an error or omission in a financial statement due to a factor OTHER than a failure of control.

Exists independently of the audit (we cannot change the client’s system)

Question 7

Define control risk?

Answer 7

material misstatement that could occur will not be prevent/detected by internal control

Exists independently of the audit (we cannot change the client’s system)