Module 14 Flashcards
Categories of inherent risk (2)
- Business risk
- Account specific risks
Business risks (3)
- Operational/ Strategic
- Reliable financial reporting
- Compliance
Business risk only relevant as an inherent risk if
Could result in a material misstatement in the financial statements
Audit Risk =
Inherent risk x control risk x detection risk
Financial statement risk examples (3)
- Fraud
- Going concern
- Weak control environment
Assertion level risks
Linked to the individual transactions, balances and, where applicable, the assertion
Industry specific risks may pose
Additional audit risks
5 step approach to determining materiality
Step 1) Appropriate benchmark
Step 2) Appropriate range to apply to the benchmark
Step 3) Select data to be used to calculate materiality
Step 4) Calculate materiality range
Step 5) Select final materiality figure from within range
Profit before tax benchmark percentage
5-10%
Operating expenses benchmark percentage
0.5-2%
Revenue benchmark percentage
0.5-2%
Total assets benchmark percentage
0.5-2%
Net assets benchmark percentage
0.5-2%
Considerations in determining final materiality figure from within the range (6)
- Listed or PIE
- First year audit
- Going concern issues
- High fraud risk
- Control environment
- Historical material misstatements
Considerations when setting performance materiality (3)
- PY misstatements
- Control environment
- Expectations of misstatements
