RISK AND MATERIALITY

Question 1

What is Audit Risk ?

Answer 1

A risk that a financial statement are materially incorrect, even though the audit opinion states that te financial statement are free from material mistatements.

Question 2

What is Acceptable Audit Risk ?

Answer 2

How willing an auditor is to accept that the financial statements may be materially misstated after audit is completed and unqualified opinion had been issued.

Question 3

What is the relationship between AAR and Evidence ?

Answer 3

Inverse Relationship

Question 5

What is the auditor’s response to Risk Assessment ?

Answer 5

1. Assess the risk of material misstatement
2. Determine the audit procedures based on the risk assessment
3. If risk is high then perform an extended audit procedure
4. If risk is low then perform a manual procedure
5. Issue audit report

Question 6

What is Audit Risk Model ?

Answer 6

AR = IR x CR x DR

Question 7

What is inherent risk ?

Answer 7

The risk that relate to characteristics of company and more likely to occur when transaction is complex and needed a high degree of judgement in regard to financial estimates.

Question 8

What is Control Risk ?

Answer 8

It is a risk that internal control system cannot detect or prevent fraud or error on a timely basis.

Question 9

What is Detection Risk ?

Answer 9

It is a risk that auditor’s substantive testing cannot detect misstatement and it is the only risk that can be control by an auditor after assess the control and inherent risk.

Question 10

What are the factors that lead to audit risk (uncertainty) ?

Answer 10

1. Nature of audit test (The use of sampling which do not cover the overall items)
2. Inherent limitations of the effectiveness of internal control systems (human errors and carelessness)
3. The conclusion made is persuasive rather conclusive

Question 11

What is the relationship of components of audit risk ?

Answer 11

Detection risk is inversely proportional to the inherent and control risk.

Question 12

Inherent risk can be considered at two levels. What are they ?

Answer 12

1. Financial Statement
2. Account balance

Question 13

What are the factors of inherent risk at financial statement level ?

Answer 13

1. Nature of client’s business
2. The management (Experience, Integrity and attitude of directors and mgt)
3. Unusual pressure on management (Tight report deadlines)
4. Factors affect industry (To maintain competitiveness, company tend to misstate any material figures to show promising trend)
5. Initial versus repeat management (Auditors will gain experience after having knowledge about the mistatement)

Question 14

What are the factor of IR in account balances ?

Answer 14

1. Result of prev audit
2. Related parties
3. Non Routine Transaction
4. Judgement is required to correctly record
5. Other factors

Question 15

What happen if the IC of company was effective ?

Answer 15

Low Control Risk

Question 16

How to manage audit risk ?

Answer 16

1. Strong team
2. Enough time
3. Assessment of clients’ internal control system
4. Planning
5. Monitoring and supervision

Question 17

IC cannot provide conclusive insurance and why ?

Answer 17

Cause there is an inherent limitations during the internal control such as
1. Human error
2. Collusion of mgt and employee
3. Changes of environment
4. Unable to address un routine transaction

Question 18

What level can control risk can be considered ?

Answer 18

1. General
2. Specific

Question 19

What auditor need to do after assessing the IR and CR ?

Answer 19

Decide what level of DR will bring AR to low level such as :
1. Appropriate Planning
2. The timing of SP
3. The extent of SP

Question 20

What is the relationship between AR and evidence ?

Answer 20

Inverse

Question 21

What are the relationship between AR and IR and CR ?

Answer 21

Direct

Question 22

Relationship between materiality and AR

Answer 22

Inverse

Question 23

Define the term of materiality ?

Answer 23

Information is material if it omission or misstatement could influence the economic decision of users taken on the basis of financial statements.

Question 24

What are the steps in applying materiality ?

Answer 24

1. Set a preliminary judgement
2. Break down the threshold into smaller sections so that we can focus more
3. Find errors and total up and compare.
4. If errors is smaller than preliminary judgement (threshold) hence it is still okay for fs.

Question 25

What is quantitative factor for materality ?

Answer 25

1. It is typicall from 3 -5 %
2. Total assets.
3. Total revenue.
4. Net profit
   before tax.
5. Gross profit.

Question 26

Qualitative factors that affect
materiality ?

Answer 26

1. Use inappropriate/
   inadequate accounting
   policy.
2. Cumulative small
   amount of
   misstatements.
3. Fraud/ non compliance
   with laws and
   regulations.
4. Amounts that affect
   trend in earnings.

Question 27

The importance of materiality ?

Answer 27

1. accounts cannot be
   perfectly accurate, and so allows small errors
2. If accounts had to be perfectly accurate, auditors
   would have to check every transaction
3. However, materiality allows an auditor to check only a
   sample of items
4. In this way the number of items checked in an audit is
   a small percentage of the total transactions, and the
   audit is completed at a reasonable cost.