Materiality and Risk Flashcards
What is materiality?
The significance of misstatements, including omissions, are considered material if they could reasonably be expected to influence the economic decisions of users.
How is materiality used by auditors? (4)
- In considering the extent of audit procedures
- In determining the appropriate treatment of detected errors
- In determining the appropriateness of disclosure
- In forming an audit opinion
What is audit risk?
The risk that an auditor expresses an inappropriate opinion when the financial statements are materially misstated
Type I error:
Error of incorrect rejection (Reject when shouldn’t have)
Type II error:
Error of incorrect acceptance (Accept when shouldn’t have)
Audit risk consists of which 3 elements?
Inherent risk x Control risk x Detection risk
What is inherent risk?
The chance that a mistake or fraud could happen in the financial statements BEFORE any checks or controls are applied
What is control risk?
The chance that a company’s internal controls won’t catch or prevent errors or fraud in the financial statements
What is detection risk?
The risk that procedures performed by an auditor will not detect a misstatement that exists
What is audit evidence? What does it include?
Information used by the auditor in arriving at the conclusions the auditor’s opinion is based on. Includes information contained in the accounting records and other information that may support or contradict recorded information.
What is sufficiency? What is it influenced by? (4)
The measure of the quantity of audit evidence.
1. Materiality and risk of misstatement
2. Economic factors
3. Size and characteristics of accounting population
4. Audit judgement
What is appropriateness?
The measure of the quality of audit evidence. How relevant and reliable is it.
Classification of Audit evidence (2)
- Directly observable (physical evidence, original documents, observation)
- Indirectly verifiable (documentary evidence, later representations from staff, computer records)
