Module 12 Flashcards
What is the definition of audit risk?
The risk that the auditor gives the wrong opinion on the financial statements when the financial statements are materially misstated
Will seek to reduce audit risk
Giving the incorrect opinion may result in what?
Damage to the firms reputation and possible regulatory action
What is misstatement?
Difference between an amount, classification, presentation or disclosure in the financial statements and the correct treatment in accordance with applicable financial reporting framework
Can arise from fraud or error
What is the risk based approach designed to do?
Provide the highest quality evidence in a given time or for a given fee
Ensure that adequate evidence is collected
What is the balance required for external audit?
Highlight irregularities in the financial statements whilst avoiding undue delay of the publication and without running up a significant fee
What is the risk based approach?
Where the auditor tailors the nature, extent and timing of audit procedures performed according to the risk of there being a misstatement in that area
What are the 5 fundamental principles of auditing?
Confidentiality Objectivity Professional competence Integrity Professional behaviour COPIP
What are the ethical threats?
Management Advocacy Self review Self interest Intimidation Familiarity MASSIF
Besides the central concept of risk, what are the three fundamental concepts of the audit process?
Materiality
Evidence
Audit judgement
What is materiality?
An expression of relative significance or importance of a matter in the whole context of f/s.
A matter is considered to be material if its omission or misstatement would reasonably influence the economic decisions of the users.
How does materiality impact the auditor?
Determines the scope of work performed
Determines the nature of the final audit opinion
An item can be material because of its what?
Size (quantitative)
Nature (qualitative)
When should materiality be considered by the auditor?
At every stage
The auditor can only express an opinion if they have collected enough what?
Evidence
What are the three methods of gathering evidence?
Understanding the entity (planning)
Testing the controls (systems/controls)
Testing the numbers (substantive and completion)
What is professional judgement?
Use judgement in assessing the evidence and forming conclusions
What is professional scepticism?
A questioning mind that challenges management with a degree of doubt
that demands hard evidence, being alert to conditions that may indicate possible misstatement due to error or fraud and a critical assessment of audit evidence
What are the three components of audit risk?
Inherent risk
Control risk
Detection risk
What is inherent risk?
The susceptibility to material misstatement, irrespective of related internal controls
What is control risk?
Risk that the entity’s controls will not prevent or detect and correct w material misstatement on a timely basis
Increases where control is poorly designed
What is detection risk?
The risk that the auditors procedures will not detect material misstatements
What is the audit risk formula?
Audit Risk = IR x CR x DR
How is audit risk set?
At an acceptably low level, IR and CR are assessed and DR is manipulated to give the set AR
What are the two categories of inherent risk?
Financial statement level
Assertion/ account balance level
What is included in financial statement level risks?
Listed scrutiny
Seeking finance
Directors bonuses
What is included in assertion level risks?
Cash
Complex areas
What is the risk of material misstatement? ROMM
The combination of inherent risk and control risk.
The risk that a material misstatement may exist prior to auditor
How might the auditor categorise IR and CR?
High medium and low
What are the two categories of station risk?
Sampling
Non sampling
What is included in sampling risk?
Sample sizes
Materiality
Risk that sample doesn’t give same conclusions as testing whole, can be reduced by increasing sample size
What is included in non sampling risk?
New audit client
Poor review
Grade of audit team staff
Risk that incorrect judgement is made as procedures weren’t appropriate / wrongly interpreted
What type of risk is the only element controlled by the auditor?
Detection risk
Where ROMM is low, there is less chance of an error occurring. What does this mean for DR?
The auditor can accept a much higher level of detection risk as there is less chance errors exist in the first place
Where ROMM is high what does this mean for DR?
Higher risk of misstatement, auditor has to do more work so they can only accept a lower level of DR as there is high IR and CR
Audit risk is low where ROMM is low equation?
low IR x low Cr x high DR
Audit risk is low where ROMM is high equation?
high IR x high CR x low DR
Detection risk is calculated by?
Sampling risk x non sampling risk
