Risk

Question 1

Audit risk

Answer 1

• Risk that auditor expresses wrong opinion when FS are materially misstated
• set at beginning of audit to a low level

Question 2

Audit risk model

Answer 2

• AR = RMM x DR
• DR= risk that procedures performed will not detect RMM
• RMM = IR (general fraud risk) x CR (IC risk)
• RMM is only assessed by the auditor, not controlled
• DR is set by the auditor to bring AR to low level

Question 3

Relationship between IR, CR and DR

Answer 3

• if IR and CR are high, DR is low: low DR means more assurance is needed and therefore increase substantive procedures, assign experienced staff, incorporate review of WP’s
• if IR and CR are low, DR is high: higher DR means reliance on substantive procedures can decrease

Question 4

Gathering evidence in assessment of RMM

Answer 4

• inquiring with management, internal departments, BOD, legal
• performing analytical procedures on available financial information
• observing/inspecting processes, controls and documents

Question 5

RMM assessment

Answer 5

done at both OFSL and assertion level

Question 6

RMM at OFSL

Answer 6

• IR : poor financial health, market competition, first time audit, upcoming sale of company, strict regulations/reliance on FS, bank covenant, new debt, IPO, employee reliance on FS for bonus
• CR : dated GL used, lack of segregation, lack of internal audits, lack of computer IT safety, Poor control systems, management override controls, lack of policies or documentations
• OFSL decrease risks ; private company, limited users with low reliance, smaller market and low competition
• Procedures to assess OFSL risk : emphasize professional skepticism, assign experienced staff, increase supervision/review, changing timing/nature/extent of procedures, increase the location/branches to test at

Question 7

RMM at assertion level

Answer 7

• IR : technology change in industry (obsolete), Economic downturn (AR uncollectible), Inventory (highly susceptible to theft), Estimation uncertainty, complex transactions, non-routine transactions
• CR : to test CR, you only have to test the effectiveness of the controls – performance reviews (comparatives), information processing (check accuracy and completeness), physical controls (check for locks), segregation of duties (who approves what)
• AL decrease risks : when strong physical controls, when industry/nature of business are consistent with PY