Audit and Assurance Chapter 4 Flashcards
What are risk assessment procedures?
The audit procedures designed and performed to identify and assess the risks of material misstatement, whether due to fraud or error, at the financial statement and assertion levels.
What are some examples of circumstances that should be considered as part of an entity’s risk assessment process?
- Changes in the operating environment
- New personnel within an organisation
- New accounting pronouncements
- New or revamped information systems
What is the audit risk?
This is the risk that the auditor does not detect one or more of the risks that relate to an audit and gives an opinion that the financial statements are true and fair when, they are materially misstated in some way, due to incorrect/inappropriate accounting or disclosure.
- it is a factor of inherent risks, control risk and detection risk.
Audit risk= Inherent risk x Control risk x Detection risk
What is the inherent risk?
such risk is always present in areas of the client that are susceptible or prone to fraud or error
What is the control risk?
this is another risk only ever present in clients, representing the risk of controls not preventing or detecting fraud or error (eg human error or management override)
What is detection risk?
is the risk that audit procedures will not detect a misstatement. It is a representation of the acceptable amount of risk faced by the auditor. As inherent and control risk increase, the level of acceptable detection risk decreases and the auditor therefore performs more testing to keep audit risk at an acceptable level.
What is sampling risk?
this is the risk that occurs every time a sample is selected and represents that the sample does not adequately represent the population.
What is the non-sampling risk?
this occurs from the poor interpretation of a sample by the auditor, for example, the auditor may have limited experience of sampling and may have selected a suitable sample, but fails to derive the right conclusions from the data obtained.
What are the conditions necessary to demonstrate professional skepticism?
Individual Auditors- need to be curious, sufficiently informed about the client, and possess the knowledge that is required to challenge evidence.
Engagement teams- share knowledge about the client, making appropriate decisions and revisions about the audit that evolve as evidence is collected.
Audit firms- foster a culture of skepticism and a rigorous system of quality via appropriate recruitment, supervision, review, coaching, and consultation.
Audit committees and management- the audit committee has an important role to play in supporting the external audit process by dealing constructively with any challenge made by the auditor as part of its role in displaying suitable levels of professional skepticism.
What are some key ratios in measuring the consistency of certain amounts?
ROCE, Return on shareholders funds, Gross profit margin, Operating Profit margin, Expense/Revenue %, Current ratio, Qucik ratio, Inventory turnover, Inventory Holdings Period, Trade R days, Trade P days, Working capital cycle, asset turnover, interest cover, gearing.
- These two margins should be calculated in total and by product, area, and month/quarter if possible.
What is materiality?
if either the omission or misstatement of an item could reasonably affect the economic decisions of users of a set of financial statements, then that item is considered material to those financial statements.
What is performance materiality?
the amount or amounts set by the auditor at less than materiality for the financial statements as a whole. This reduces to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole.
What is meant by ‘material and pervasive’?
- are not confined to specific elements, accounts, or items of the financial statements
- if so confined, represent or could represent a substantial proportion of the financial statements
- in relation to disclosures, are fundamental to users’ understanding of the financial statements.
