Risk

Question 1

Audit Risk

Answer 1

risk that an inappropriate opinion is provided on the financial statements

AR = RMM x DR

Question 2

RMM

Answer 2

RMM = IR x CR

Auditor does not control this risk but merely assesses it

Question 3

Inherent Risk (IR)

Answer 3

general and fraud risks at the overall financial statement level and the assertion level

before the consideration of any related controls

Question 4

Control Risk (CR)

Answer 4

control risks at the OFSL and the assertion level

a material financial statement misstatement will not be prevented, detected or corrected on a timely basis by the entity’s internal control

Question 5

Detection Risk

Answer 5

Risk that the procedures performed by the auditor will not detect a material misstatement

Low detection risk requires more assurance from audit evidence - increase reliance on substantive procedures, assign more experienced staff to the audit, incorporate additional independent review of working papers

Question 6

Risk of Material Misstatement (RMM)

Answer 6

Majority of this risk assessment happens in the planning stage - can be readjusted later in the audit

Question 7

Techniques to gather evidence in the assessment of RMM

Answer 7

1. inquiring with management, internal audit department, board of directors and legal counsel
2. performing analytical procedures over available financial information
3. observing and inspecting processes, control and significant documents