chap 9 audit risk model Flashcards
why are internal controls ignored in setting inherent risk?
because they are considered separately in the audit risk model as control risk
acceptable audit risk is a measure of how willing the auditor is to accept that the FSs may be materially misstated when?
after the audit is completed and an unmodified opinion has been issued
assessments for inherent risk are typically based on what 3 things?
- discussions with management 2. knowledge of the company 3. results in audits of previous years
the audit risk model helps auditors decide what?
how much and what type of evidence to accumulate for each relevant audit objective
measures the auditors assessment of the susceptibility of an assertion to material misstatement , before considering the effectiveness of related internal controls. what risk is this?
inherent risk
measures the auditors assessment of the risk that a material misstatement could occur in an assertion and not be prevented or detected on a timely basis by the clients internal controls. what risk is this?
control risk
what is planned detection risk?
the risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality
the relationship between control risk and substantive evidence is direct/inverse
direct
T/F when an audit area has higher inherent risk, auditors commonly assign more experienced staff to that area and review the completed audit tests more thoroughly
T
when employing the audit risk model, there is a _____ relationship between acceptable audit risk and planned detection risk
direct
auditors of larger public companies choose to rely extensively on effective controls. why?
becuase they must test the effectiveness of internal control over finanical reporting to satisy the Sarbanes Oxley act requirements.
before auditors can set control risk to less than 100 percent, what are 3 things they must do
- obtain an understanding of internal control 2. evaluate how well it should function based on the understanding 3. test the internal controls for effectivness
the more effective internal controls, the lower the ____ ____ that can be assigned to control risk
risk factor
acceptable audit risk of 2% is tghe same as audit assurance of ?
98%
evaluating how well internal controls should function and testing internal controls for effectiveness are only required when?
the auditor assesses control risk below maximum risk factor (100%)
a measure of how willing the auditor is to accept that the FSs may be materially misstated after the audit is completed and an unmodified opinion has been issued what kind of risk is this?
acceptable audit risk
what is control risk?
measures the auditors assessment of the risk that a material misstatement could occur in an assertion and not be prevented or detected on a timely basis by the clients internal controls
audit assurance or it’s equivalents is the ____ of acceptable audit risk
complement or 1- acceptable audit risk
T/F the auditor will consider differences in risk levels across various audit objectives within an individual class of transactions
T
what does a planned detection risk of 5% mean?
that the auditor plans to accumulate evidence until the risk of misstatements exceeding performance materiality is reduced to 5 percent
what are the important distinctions in how the auditor assesses the 4 risk factors in the audit risk model
acceptable audit risk- auditor decided the risk the CPA firm is willing to take that the FSs are misstated after the audit is completed based on certain client related factors inherent and control risk are based on auditors expectations or predictions of client conditions detection risk is dependent completely on the other 3 risks
the relationship between control risk and planned detection risk is direct/inverse
inverse
how much and what type of evidence to accumulate for each relevant audit objective is the objective of what model?
audit risk model
the risk of material misstatement reflects the combined effect of what? (2)
inherent and control risk
inherent risk measures the auditors assessment of the susceptibility of an assertion to material misstatement , before considering what?
the effectiveness of related internal controls
what is inherent risk?
measures the auditors assessment of the susceptibility of an assertion to material misstatement , before considering the effectiveness of related internal controls
inherrent risk is inversely related to what? directly related to what?
inversely related to planned detection risk directly related to evidence
auditors use the audit risk model to further identify what?
the potential for misstatements in the overall FSs and at the audit objective level for specific account balances, classes of transactions, and disclosures wehre mistatements are most likely to occur
auditors of companies other than large public companies as well auditors of other types of entities are likely to realy on controls that are effective, especially when what?
day to day transaciton processing involves highly automated procedures
the audit risk model is usually stated as what equation?
planned detection risk = acceptable audit risk/(inherent risk * control risk)
control risk measures the auditors assessment of the risk that a material misstatement could occur in an assertion and also what?
not be prevented or detected on a timely basis by the clients internal controls
why can the auditor increase planned detection risk when controls are effective?
because effective internal controls reduce the likelihood of missatements int he FSs
the risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality
planned detection risk
what are the terms auditors use instead of acceptable audit risk? (3)
- audit assurance 2. overall assurance 3. level of assurance
T/F the auditor may make a combined assessment of the risk of material missatements or the auditor can separately assess inherent risk and control risk
T
what is acceptable audit risk?
a measure of how willing the auditor is to accept that the FSs may be materially misstated after the audit is completed and an unmodified opinion has been issued
auditors use the audit risk model to further identify the potential for misstatements in the overall FSs and at the audit objective level for what?
specific account balances, classes of transactions, and disclosures wehre mistatements are most likely to occur
what are the 2 key points to know about planned detection risk?
- it is dependent on the other 3 factors in the model (acceptable audit risk, control risk, inherent risk) and only changes if one of the other 3 changes 2. it determines the amount of substantive evidence that the auditor plans to accumulate inversely with the size of the of the planned detection risk.
T/F the audit risk model shows that inherent and control risk doesn’t have a close relationship
F they do have a close relationship
T/F obtaining an understanding of internal control is not required for all audits
F
it is common for auditors to want an equally low likelihood of missatements for each cycle after the audit is finished to permit what?
the issuance of an unmodified opinion audit report
risk meel assessments may be quantitative or nonquantiative but most firms prefer? why?
nonquantitative assessments of risk (ex. low, moderate, high) due to the difficulty in precisely quantifying measures of risk
planned detection risk is the risk that audit evidence for an audit objective will fail to detect misstatements exceeding what?
performance materiality
when employing the audit risk model, there is a _____ relationship between acceptable audit risk and planned evidence
inverse
the auditor assesses risks at the overall FS level and at what level?
audit objective level
