Fundermental CONCEPTS

Question 1

What are the two types of audit?

Answer 1

Statutory - Required by law

Voluntary- not required by law

Question 2

What is audit risk?

Answer 2

The risks that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.
Audit risk is a function of the risks of material misstatement and detection risk

Question 3

What is the audit risk model?

Answer 3

AR = RMM × DR
AR = audit risk
RMM = IR × CR

Question 4

What is RMM?

Answer 4

The RMM is the risk in the financial statements prior to the audit, because of the client’s inherent risk (IR) and control risk (CR). The auditor does not control this risk but merely assesses it.

Question 5

What is Detection risk?

Answer 5

Detection risk is the risk that the procedures performed by the auditor will not detect a material misstatement.
The auditor’s objective is to design procedures that will bring the detection risk to an acceptably low level to compensate for any RMM and thus bring the overall audit risk down.

Question 6

What to do regarding RMM when new information comes in?

Answer 6

While performing the audit, the practitioner may come across information that has an impact on the risk assessment made in the planning stage. In this case, the practitioner will need to reassess these risks and respond accordingly. However, the bulk of the risk assessment does happen during plannin

Question 7

What techniques are available to gather evidence for RMM assessment?

Answer 7

Techniques to gather evidence in the assessment of the RMM. These techniques include:
• inquiring with management, the internal audit department, the board of directors and legal counsel
• performing analytical procedures over available financial information
• observing and inspecting processes, controls, and significant documents

Question 8

What is Inherent Risk?

Answer 8

Inherent risk is the susceptibility to a financial statement misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls

Question 9

What is control risk?

Answer 9

Control risk is the risk that a material financial statement misstatement, either individually or when aggregated with other misstatements, will not be prevented, detected, or corrected on a timely basis by the entity’s internal control.

Question 10

Responses to assessed RMM?

Answer 10

• emphasizing professional skepticism to the audit team
• assigning more experienced staff to the audit team
• increasing supervision of the audit
• adding elements of unpredictability in audit procedures
• making changes to the nature, timing, and extent of the audit procedures
• if the company has multiple locations/branches, increasing the number of locations/branches to be tested