MODULE 13 Flashcards
What is Audit Risk?
The risk that the Auditor gives the wrong opinion
Auditing standards require the auditor to adopt a risk based approach, this focuses attention rot the areas most likely to contain a material misstatement.
What’s Materiality?
Something is material when its omission or misstatement would impact the decisions of the users
It’s also an expression of the relative significance of importance of a particular matter in the context of the financial statement as a whole
What can Inherent risk arise from?
Must be both:
- Business risks
- Account specific risks
Formula for ROMM and detection risk
ROMM- Inherent Risk x Control Risk
Detection Risk - SR x NSR
A risk based approach is designed to:
- Provide highest quality evidence in a given time for a given fee
- Ensure adequate evidence is collected on which audit opinion can be based
How does materiality impact the Audit?
Determines the scope of work performed (which items are tested and to what degree)
Determines nature of the final audit opinion, when a material misstatement exists in the financial statement, it doesn’t give a true and fair view
What’s reasonable assurance
When an auditor must gather sufficient appropriate evidence to reduce audit risk to an acceptably low level.
What are assertion level risks?
They are risks that relate to a specific area ofd the accounts only, such as debtors valuation or the completeness of sales transactions.
The impact of the misstatement would be at the assertion level risk
What’s detection risk
Risk that the auditor will not find the mistatement
What’s Low detection Risk?
Low chance of detecting the whisk.
Results in auditor having to increase the work performed
What’s High Detection Risk?
High chance of detecting the risk
Results in Auditor reducing the work performed to detect the misstatement
What’s Low ROMM (Risk Of Material Misstatement)
Low ROMM means less chance of a risk occurring, therefore an Auditor can do less work to detect the misstatement
What’s High ROMM (Risk Of Material Misstatement)
High ROMM means high chance of a risk occurring, therefore an Auditor has to do more work to detect the misstatement
What are the two elements of Detection Risk
Sampling Risk - Risk that testing for a sample doesn’t give same conclusions as testing whole population = increase sample size
Non Sampling Risk - The risk that incorrect judgement was made because audit procedures were not appropriate or testing results were wrong = Adequately planning, professional scepticism and adequate review of work performed
