Risk Flashcards
What is the over all picture of Risk?
Audit risk is:
The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated
Audit Risks are related to?
Assertions about classes of transactions and events for the period under audit
– occurrence completeness, accuracy, cut off and classification.
Assertions about account balances at the period end
– existence, rights and obligations completeness, and valuation and allocation.
Assertions about presentation and disclosure
– occurrence and rights and obligations, completeness, classification and understandability, and accuracy and valuation.
What is materiality?
material if ‘its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements.’
could be large transactions or significant events.
if a material item is incorrect, the financial statements will not show a ‘true and fair view.’
Generally, materiality will be set with reference to the financial statements such as:
0.5 – 1% of turnover
5 – 10% of profits reported
1 – 2 % of gross assets
What is Performace Materiality?
Performance Materiality
This is lower than normal materiality
to prevent all those small, undetected errors do not aggregate to become material directors’ remuneration.
What are the different Audit Samples?
What are the limitations of internal controls?
Cost vs. Benefit
Collusion from staff: May result in fraud no matter how strong the controls are
Human Error
Management Override
Practice is different from theory
The specific circumstances of the entity make some controls unworkable
or
be manipulated in practice by those involved in the system
How are controls Reported?
Weaknesses
Significan Deficiencies are reported to TCWG
Determining if a deficiency is significant
Likelihood of leading to misstatement
susceptibility to loss of fraud of related asset or liability
Subjectivity and complexity of determining amounts
Interaction of deficiecny with other decficncys
What are computer system controls?
Application controls
Inputexistencekey data must be inputted or else rejected
range checkspre determined max, if over then rejected.
processingRun to Run
Checking on what, when who processing donw
aggregate the input invoices compare this with control total
General IT controls ensure the information system can run properly
Security (password etc) controls
Backup controls
Software system acquisition controls
Software change and maintenance controls
Many transactions may now be automated and the automation must be checked and understood.
Large volumes of transactions can now be performed by IT systems leading to greater focus on how the transactions are generated
Advs’ and Disadvantages of CAATs’
Advantages
Independently access computer data
Test the reliability of client software
Increase the accuracy of audit tests
Perform audit tests more efficiently
Disadvantages
CAATs can be expensive and time consuming to set up
Client permission and cooperation may be difficult to obtain
Potential incompatibility with the client’s computer system
The audit team may not have sufficient IT skills
Data may be corrupted or lost during the application of CAATs
Audit Software
The auditor may use audit software to run the client data to check for errors
It can be an off-the-shelf software or bespoke for the client.
They can scrutinise large volumes of data, whose results can be investigated further
The software does not, however, replace the need for the auditor’s own procedures
It can
select a sample using different sampling techniques
check calculations
automate the confirmation letter process
produce reports
follow transactions
What are the Auditors responsibilities for Fraud?
Auditor Responsibilities
Obtaining reasonable assurance that the financial statements
are free from material mistatemtn caused by error or fraid
Obtain suffircient evidence
While obtaining maintain professional skepticism
Ensure whole engagemnt team is
aware of the risks and responsibilities for fraud and error
If fraud is discovered
Report it to the audit committee or
Highest level of management (if not involved in the fraud), or
Shareholders if the fraud is by those in senior management
