Module 2: Engagement Planning Obtaining an Understanding of the Client and Assessing Risks Flashcards
Inherent risk
the likelihood of material misstatement of an assertion, assuming no related internal control. This risk is assessed using various analytical techniques, available information on the company and its industry, as well as by using overall auditing knowledge.
Control Risk
the likelihood that a material misstatement will not be prevented or detected on a timely basis by internal control. The risk is assessed using the results of test of controls. Tests of controls that provide audit evidence that controls operate effectively will ordinarily allow the auditor to assess control risk at a level below the maximum.
Detection Risk
the likelihood that an auditor’s procedures lead to an improper conclusion that no material misstatement exists in an assertion when in fact such misstatement does exist. Substantive procedures are primarily relied upon to restrict detection risk. Auditors increase the nature, timing, or extent of substantive procedures to decrease the assessed level of detection risk.
Materiality
Materiality is “the magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.”
Fraudulent Financial Reporting
involves intentional misstatements or omissions of amounts or disclosures in financial statements to deceive financial statement users and improperly recording the revenue results in such misstatements.
Attest Engagement
a CPA is engaged to issue or does issue an examination , a review, or an agreed-upon procedures report on subject matter, or an assertion about subject matter, that is the responsibility of another party.
Assurance Services
Independent professional services that improve the quality of information, or its context, for decision makers.
“Further Audit Procedure”
Two types: Substantive procedures and test of controls. When the risk assessment is based on an expectation that controls are operating effectively, the auditor should perform test of controls to provide evidence on weather those controls are operating effectively.
Statements on Quality Control Standards
Provide guidance for CPA firms in meeting their responsibility to provide professional services that conform with professional standards.
Interpretations of the Statement of Auditing Standards
Provide timely guidance on the application of certain pronouncements of the Auditing Standards Board, their coverage is less complete than the standards.
Audit Risk
Consist of 1) the risk that an account and its related assertions contains material misstatements (composed of two components, referred to as inherent risk and control risk) and 2) the risk that the auditor will not detect such misstatements (referred to as detection risk)
