Audit standards and engagement planning Flashcards
What is audit risk?
The risk that the auditor may unknowingly fail to appropriately modify the opinion on financial statements that are materially misstated.
What is risk of material misstatement?
The risk that the relevant assertions related to account balances, classes of transactions, or disclosures contain misstatements that could be material to the financial statements when aggregated with other misstatements. IRxCR
What is inherent risk?
The risk that a material misstatement of an assertion will occur in the absence of any internal controls. (Cash is more susceptible to theft than fixed assets)
What is control risk?
The risk that the client’s internal control structure will fail to prevent or detect and correct a material misstatement on a timely basis.
What is detection risk?
The risk that audit procedures will incorrectly lead to a conclusion that a material misstatement does not exist in an account balance when it does exist.
What is the fraud triangle?
Motivation (pressure/incentive)- Have a reason to commit the fraud
Opportunity-Have the ability to commit the fraud (weak internal controls)
Rationalization- Rationalize the fraud (Believe it is common practice, or greedy execs deserve this)
What is the auditor required to document when assessing control risk?
Basis for concluding the control risk at that level.
When is a misstatement considered material?
When it can influence the decisions of a financial statement user. (IE, changes operating results from a net loss to a net income)
Does the successor auditor need the client’s permission to communicate with the predecessor auditor?
Yes. The predecessor auditor may not respond to requests for information from successor without permission of client due to the confidential nature of information obtained during an audit.
Who has responsibility over the financial statements?
Management ALWAYS has responsibility over the financial statements.
What is the mathematical relationship between detection risk and audit risk?
Inverse relationship.
Control risk should be determined in terms of what?
Financial statement assertions.
Should an auditor refuse to accept a client who has been issued an adverse opinion in the last three years?
No. There is no rule for refusal, but the auditor should understand the reason for the opinion before accepting the client.
What questions will a successor auditor ask a predecessor auditor?
R-Reason for the change
I-Integrity of management
D-Disagreements during the audit
C-Communication with management or those charged with governance.
Any of these may cause the successor to get RID of the new client and C ya later.
