Audit risk assessment Flashcards
6 Financial Statement Assertions
- Existence or occurrence
- Valuation and allocation
- Accuracy
- Completeness
- Rights and obligations
- Presentation and disclosure
Business risk
Significant conditions, events, circumstances and actions that could affect the entity’s ability to achieve its objectives
3 categories of business risk
- Financial risk
- Operational risk
- Compliance risk
4 business risk procedures
- Enquiries
- Analytical procedures
- Observation
- Inspection
Importance of internal controls
- Reliability of financial reporting
- Operational effectiveness and efficiency
- Compliance with laws and regulation
Limitations of internal controls
- Cost vs. benefit
- Breakdowns
- Mistakes in judgement
- Changes in conditions
- Non-routine transactions
Management internal control responsibilities
- Assets are safeguarded
- Irregularities are prevented, detected and corrected
- Financial records are accurate
- Adherence to management policies
- Operational efficiency is promoted
Auditor internal control responsibilities
- Obtain understanding of internal controls
- Determine nature, timing and extent of tests
5 components of the internal control system
- Control environment
- Risk assessment
- Information systems and communication
- Control activities
- Monitoring
Understanding internal controls
- Identifying misstatements that may occur
- Understanding factors that affect risk of material misstatement
- Designing further audit procedures
- Testing controls in computerized systems
Procedures to obtain understanding of internal controls
- Reviewing previous experience with entity
- Inquiries of management and staff
- Observation of documents
3 ways to document internal control understanding
- Internal control questionnaire
- Flow chart
- Narrative memoranda
Inherent risk
Possibility material misstatement will occur resulting from something other than internal controls
Control risk
Risk that misstatements will not be detected by integral controls on a timely basis
Detection risk
Risk that an auditor’s substantive procedures will not detect any material misstatements that exist in an assertion
