CH 9 Flashcards
What is auditor’s responsibility?
1) determine whether financial statements are materially misstated
2) to help clients’ fix misstatements
What are the steps of applying materiality?
1) Set materiality for the financial statements as a whole ( planning extent of tests)
2) determine performance materiality ( planning extent of tests)
3) Estimate total misstatement in segment ( evaluating results)
4) Estimate the combined misstatement ( evaluating results)
5) Compare combined estimate with preliminary or revised judgement about materiality ( evaluating results)
When do auditors set materiality thresholds?
1) early in the engagement
What is materiality?
the magnitude of an omission or misstatement of accounting information that the person was influenced by the omission.
What are the maximum amount that statements could be misstated and still not affect users’decisions?
Threshold
What are factors affecting judgement?
materiality ( what is small companies vs large companies level of materiality)
Benchmarks ( observe and compare current liabilities, assets, and current assets, SE)
Qualitative factors small materiality (misinterpretation of values, errors, earnings trends)
What is performance materiality
1) set by the auditor at less than materiality for the financial statements as a whole
to reduce to an appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceed materiality for the financial statements as a whole.
What can performance materiality tell an auditor?
helps decide what appropriate audit evidence to accumulate
What are two types of “likely” misstatements?
1) judgemental differences
2) Projections of misstatements from audit samples
What does PDR, AAR, IR, and CR mean?
PDR=planned detection risk
AAR=acceptable audit risk
IR=inherent risk
CR=control risk
What are the components of “ understanding Client’s business and industry”?
1) industry and external environment
2) business operations and processes
3) Management and Governance
4) Objectives and Strategies
5) Measurement and performance
What is Planned detection Risk?
1) risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality.
What is formulate of audit risk model?
PDR= AAR/IR+CR
Define control risk
material misstatement could occur in an assertion and not be prevented or detected on a timely basis by the client’s internal controls
Define acceptable audit risk
1) auditor’s judgement after unqualified opinion has been issued that financial statement may be materially misstated.
