Audit Risk Flashcards
What is Audit Risk?
The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated
What is Reasonable Assurance?
In the context of an audit of financial statements, a high, but not absolute, level of assurance (aka “high level of assurance” and a “low level of audit risk”)
What is the Basic Auditor Responsibility?
The auditor should properly plan and perform the audit to obtain reasonable assurance that material misstatements, whether caused by errors or fraud, are detected
The one overriding audit planning objective is to limit audit risk to an appropriately low level, which involves the following…
1 Determining the extent and nature of the auditor’s risk assessment procedures
2 Identifying and assessing the risk of material misstatement
3 Determining the nature, timing, and extent of further audit procedures
4 Evaluating whether the financial statements taken as a whole are presented fairly in conformity with GAAP
What’s the meaning of Risk of Material Misstatement (RMM)?
The risk that the financial statements are materially misstated prior to the audit
What are the 2 levels of Risk of Material Misstatement (RMM)?
1 The overall financial statement level
2 The assertion level for classes of transactions, account balances, and disclosures
What is the RMM at the Overall Financial Statement Level?
Risks that are “pervasive” to the financial statements and that potentially affect many assertions
What is the purpose of RMM at the Assertion Level?
To determine the nature, timing, and extent of further audit procedures to obtain sufficient appropriate audit evidence
What are the 3 components of RMM at the assertion level?
1 Inherent risk
2 Control risk
3 Detection risk
What is Inherent Risk?
The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures (environment, we have no control)
What is Control Risk?
The probability that a material misstatement that occurred in the first place would not be detected and corrected by internal controls (management’s responsibility to design internal controls) (environment, we have no control)
What is Detection Risk?
The probability that a material misstatement that was not prevented or detected and corrected by internal control was not detected by the auditor’s substantive audit procedures (auditor’s responsibility)
What is the order of Risk?
audit risk is set, then inherent risk is assessed, then control risk is assessed, and finally the implications for the appropriate level of detection risk are considered
If IR and CR are seen by the auditor as too high, what must be done?
The auditor must compensate by decreasing DR
If IR and CR are perceived as low, what must be done?
The auditor may consider accepting a higher DR