Audit Risk Flashcards
Define audit risk:
Risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated
Audit risk is a probability and that the audit risk and materiality are interrelated by the definition of audit risk?
True
Define reasonable assurance:
that audit risk cannot be reduced to a zero probability. High but not absolute level of confidence.
The one overriding audit planning objective is to…?
limit audit risk to an appropriate low level
The risk of material misstatement (RMM) is defined as and contains what components?
1) The financial statement level
2) The assertion level
Risk of material misstatement at the financial statement level refers to risk that…
are perverse to the financial statements and potentially affect many assertions
Risk of material misstatement at the assertion level consists of three component risks, what are they?
1) Inherent Risk
2) Control Risk
3) Detection Risk
Define Inherent Risk:
Control Risk:
Detection Risk:
The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures
That a material misstatement that occurred in the first place would not be detected by internal controls
The probability that a material misstatement that was not prevented or detected and corrected by internal control was not detected by the auditors substantive audit procedures
The more you increase detection risk or decrease detection risk (what’s in the auditors control), what happens?
It adjusts the amount of substantive testing the auditors will do