Risk Flashcards
One of the main requirements of the auditor is to:
obtain sufficient appropriate evidence to reduce audit risk to an
acceptably low level
Audit risk is
the risk that the auditor expresses an inappropriate
opinion when the financial statements are materially misstated
What is a misstatement?
A difference between the reported amount, classification,
presentation, or disclosure of a financial statement item and the
amount, classification, presentation, or disclosure that is required for
the item to be in accordance with the applicable financial reporting
framework. Misstatements can arise from error or fraud
There are three categories of misstatements:
(i) Factual misstatements: a misstatement about which there is no
doubt.
(ii) Judgemental misstatements: a difference in an accounting
estimate that the auditor considers unreasonable, or the selection
or application of accounting policies that the auditor considers
inappropriate.
(iii) Projected misstatements: a projected misstatement is the auditor’s
best estimate of the total misstatement in a population through the
projection of misstatements identified in a sample
Inherent risk
the susceptibility of an assertion about a class of
transaction, account balance or disclosure to misstatement that
could be material, before consideration of any related controls
Control risk
the risk that a misstatement that could occur and that
could be material, will not be prevented, or detected and corrected on
a timely basis by the entity’s controls
Detection risk
the risk that the procedures performed by the
auditor to reduce audit risk to an acceptably low level will not detect
a misstatement that exists and that could be material
Detection risk comprises
sampling risk and non-sampling risk
Sampling risk
the risk that the auditor’s conclusion based on a sample
is different from the conclusion that would be reached if the whole
population was tested, i.e. the sample was not representative of the
population from which it was chosen
non-sampling risk
the risk that the auditor’s conclusion is inappropriate
for any other reason, e.g. the application of inappropriate procedures or
the failure to recognise a misstatement
Professional scepticism
An attitude that includes a questioning
mind, being alert to conditions which may indicate possible
misstatement due to fraud or error, and a critical assessment of audit
evidence
Materiality
Misstatements, including omissions, are considered to be material if
they, individually or in the aggregate, could reasonably be expected
to influence the economic decisions of users taken on the basis of
the financial statements
The determination of materiality is a matter of professional judgement. The auditor must consider:
Whether the misstatement would affect the economic decision of the users
Both the size and nature of misstatements
The information needs of the users as a group.
Materiality is a subjective matter and should be considered in light of the client’s
circumstances.
ISA 320 recognises the need to establish a financial threshold to guide audit
planning and procedures. The following benchmarks may be used as a starting
point:
½ – 1% revenue
5 – 10% profit before tax
1 – 2% total assets
Performance materiality is
The amount set by the auditor at less than materiality for the financial statements as a whole to reduce to an appropriately low level the probability that the aggregate of
uncorrected and undetected misstatements exceeds materiality for the financial statements as a whole
