Audit Planning 2 Flashcards
What are preliminary analytical procedures in an audit?
They assist in planning the nature, timing, and extent of audit procedures, identify potential errors, and determine areas requiring detailed checking and substantive tests.
What is the definition of materiality according to ISA 320?
Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements. Materiality depends on the size and nature of the item or error.
What is audit risk?
The risk that the auditor gives an unmodified/unqualified audit opinion when the financial statements are materially misstated.
What are the components of the audit risk model?
Audit risk (AR) = Inherent risk (IR) × Control risk (CR) × Detection risk (DR).
What is control risk?
The risk that material misstatements will not be prevented or detected on a timely basis by an entity’s internal control.
What is inherent risk?
The susceptibility of an assertion to material misstatement in the absence of internal control.
How does materiality relate to audit risk?
There is an inverse relationship between materiality and the level of audit risk. If materiality level is lower, audit risk is increased.
What is detection risk?
The risk that substantive audit procedures will not detect a material misstatement that exists in an account balance or class of transaction.
What are the steps to minimize audit risk?
Plan and delegate the audit with due care, document audit evidence properly, select competent audit staff, ensure sample selection represents the population, avoid misunderstandings with the client, and maintain good communication among audit staff.
What is audit sampling?
The application of audit procedures to less than 100% of items within an account balance or class of transactions to obtain and evaluate audit evidence about some characteristic of the items selected.
What are the advantages of statistical sampling in audits?
t allows calculation of precision and reliability, requires systematic planning, permits objective interpretation of results, enables reliance on smaller sample sizes, and allows more intensive examination of sample items.
What factors influence the size of an audit sample?
Planned reliance on internal control, allowable rate of deviation, allowable risk of over-reliance, likely rate of population deviation, number of items in the population, reliance on other substantive tests, measure of tolerable error, and expected size and frequency of errors.
