Audit Standards and Engagement Planning (a) Flashcards
A Presumptively Mandatory Requirement?
The use of the word “SHOULD” makes READING the financial statements a PRESUMPTIVELY MANDATORY requirement. An accountant is required to comply with a presumptively mandatory requirement in ALL circumstances to which it applies UNLESS the accountant can DEMONSTRATE that OTHER procedures performed accomplished the SAME OBJECTIVE as performing the requirement.
An auditor will respond to an increased risk of material misstatement by?
An auditor will respond to an INCREASED risk of material misstatement by MODIFYING the NATURE of substantive procedures, selecting those likely to be more effective; MODIFYING the TIMING of substantive procedures by performing FEWER at interim periods and more near the end of the period; and INCREASING the EXTENT of substantive testing by performing MORE procedures and selecting LARGER sample sizes. The auditor will also use MORE EXPERIENCED staff or staff with SPECIALIZED SKILLS to perform procedures.
regarding detection risk and the audit risk model
Audit risk, the risk that the auditor will FAIL to ISSUE an appropriate report when the financial statements are materially misstated, consists of the risk of material misstatement (RMM), which is the risk that the financial statements will be MATERIALLY MISSTATED, and detection risk (DR), which is the risk that the audit will NOT DETECT the material misstatement. RMM consists of inherent risk (IR), which is the risk that an item will be materially misstated if there are NO CONTROLS in place, and control risk (CR), which is the risk that the entity’s internal control will NEITHER PREVENT the material misstatement NOR DETECT and CORRECT it on a timely basis.
The formula for calculating audit risk (AR) is?
The formula for calculating AR is RMM x DR indicating that, as RMM DECREASES, DR may INCREASES without affecting AR, which can be calculated as DR = AR/RMM.
Operational audits?
Operational audits, often performed by INTERNAL AUDITORS and GOVERNMENTAL AUDITORS, are designed to determine if an entity is OPERATING as it is expected to, including the EXECUTION OF DUTIES in accordance with the entity’s INTERNAL CONTROL POLICIES AND PROCEDURES.
The primary objective of assessing control risk is?
The primary objective of assessing control risk is to determine the RISK that material misstatements EXISTS in the financial statements. The HIGHER the control risk, the MORE LIKELY financial statements are MISSTATED.
Audit risk is?
Audit risk is the risk that the auditor will issue an inappropriate opinion when the material misstatement can be decreased by performing a more thorough audit. DECREASING AUDIT RISK would be associated with a DECREASE in the assessed level of MATERIALITY, which would require the auditor to look at SMALLER items. Similarly, the auditor REDUCES DETECTION RISK by performing a MORE THOROUGH audit, implying a LOWER assessed level of MATERIALITY. Inherent risk is based on the NATURE of the items on the entity’s financial statements and is not within the control of the auditor. As inherent risk, the risk that an item will be materially misstated if there are no controls in place, DECREASES, the risk that the financial statements will be materially misstated also DECREASES and the auditor will be able to achieve an ACCEPTABLE LEVEL of assurance despite performing a LESS THOROUGH audit. This would indicate INCREASING the assessed level of MATERIALITY to be applied in the audit as the auditor will limit procedures to the more significant aspects.
The auditor performs substantive tests to?
The auditor performs substantive tests to address detection risk. When DETECTION RISK is HIGHER than acceptable, it is DECREASED by INCREASING SUBSTANTIVE TESTING. Substantive testing can be DECREASED when the risk of material misstatement is LOW and a HIGH LEVEL of DETECTION RISK is ACCEPTABLE. TESTS of CONTROLS are performed in the evaluation of CONTROL RISK and are NOT related to detection risk.
To reduce audit risk to an acceptable level, the auditor evaluates?
To reduce audit risk to an acceptable level, the auditor evaluates the risk of material misstatement (RMM) and determines the level to which detection risk must be REDUCED. RMM consists of inherent risk, which is the risk that an item will be materially misstated if there are no controls in place, and control risk, which is the risk that internal controls will NEITHER PREVENT a material misstatement NOR DETECT and CORRECT it on a timely basis. Either of these, as is also true of audit risk and detection risk, may be expressed in either QUANTITATIVE or QUALITATIVE terms.
