Study Unit 3 - Planning & Risk Assessment Flashcards
What are the responsibilities of management in an audit engagement?
Management is responsible for
* Using an acceptable financial reporting framework
* The preparation and fair presentation of the financial statements
* The design, implementation, and maintenance of internal control
* Providing access to all information and persons deemed necessary for the audit
What is the key responsibility of auditors in an audit engagement?
Auditors are responsible for conducting the audit in accordance with GAAS.
Give examples of typical terms of an audit engagement letter.
- Objective and scope of the audit
- Responsibilities of the auditor and management
- Inherent limitations of the audit and internal control
- The financial reporting framework
- The expected form and content of audit papers
What should be documented in audit plans?
- The overall audit strategy (basis of the audit plan)
- Procedures to be performed
- Risk assessment procedures
- Further procedures
- Other procedures
- Involvement of specialists
What three aspects of audit procedures should be documented in audit plans?
NET of procedures
N = Nature
E = Extent
T = Timing
When the prior-period statements are audited by a predecessor auditor, what should the auditor request from management?
- The auditor should request management to authorize the predecessor to
- Allow a review of audit documentation and
- Respond fully to inquiries by the auditor.
What is audit risk?
Audit risk is the risk that an auditor expresses an inappropriate opinion on materially misstated financial statements.
Should audit risk be considered only in planning an audit?
Audit risk and materiality should be considered when (1) planning the audit, (2) performing the audit, (3) evaluating the results, and (4) forming an opinion.
What does audit risk consist of?
Audit risk = inherent risk x control risk x detection risk
= Risk of material misstatement x Detection risk
What is the risk of material misstatement?
The risk of material misstatement is the risk that the financial statement are materially misstated. It consists of
- Inherent risk: Susceptibility of an assertion before considering related controls - Control risk: Risk that the internal control will not timely prevent, detect, or correct a material misstatement
What is detection risk?
Detection risk is the risk that procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a material misstatement. It is inversely related to the assessed risk of material misstatement.
Which component(s) of audit risk can be changed at the auditor’s discretion?
Component Risk Can be Changed at Auditor’s Discretion?
Inherent Risk No, only assessed
Control Risk No, only assessed
Detection Risk Yes
List the three levels of materiality.
- Materiality at the financial statement level
- Materiality for account balances, classes of transactions, or disclosures
- Performance materiality
What are the three types of misstatement?
- Factual misstatement
- Misstatement with no doubts
- Judgmental misstatement
- Management’s unreasonable financial statement recognition, measurement, presentation and disclosure
- Management’s application of inappropriate accounting policies
- Projected misstatement
- Auditor’s best estimate of misstatements
What should auditors document for misstatements?
- The amount below which misstatements are clearly trivial
- All misstatements accumulated
- Whether accumulated misstatements have been corrected
- The basis for the conclusion about whether uncorrected misstatements are material
What are the purposes of obtaining an understanding of the entity and its environment?
- Identify and assess the risk of material misstatement
- Provide a basis for designing and implementing responses to the assessed risk of material misstatement
Give examples of typical risk assessment procedures.
- Inquiries of management and appropriate individuals in the internal audit function
- Analytical procedures
- Observation and inspection
What are the five basic steps of audit data analytics (ADA)?
- Plan the ADA
- Access and prepare the data
- Consider the relevance and reliability of the data used
- Perform the ADA
- Evaluate the results and conclude whether the purpose and specific objectives have been achieved
List the five sources of information used to develop analytical procedures.
- Financial information form comparable prior period(s)
- Anticipated results (budgets)
- Relationships among elements of financial information
- Comparable information form the client’s industry
- Relationships between financial and relevant non financial information
When are analytical procedures required to be used?
Analytical procedures are required to be used
- As a risk assessment procedure when planning the audit
- To form an overall conclusion toward the end of the audit
Give examples of the factors affecting the effectiveness and efficiency of analytical procedures.
- Nature of the assertion
- Plausibility and predictability of the relationship
- Availability and reliability of the data used to develop the expectation
- Precision of the expectation
What type of analysis that compares two values is frequently applied as an analytical procedure?
Auditors apply ratio analysis in all stages of the audit as analytical procedures.
What are the two types of fraud?
Fraud is an intentional, deceptive act that includes
1. Fraudulent financial reporting and
2. Asset misappropriation.
What are the three conditions that are ordinarily present when fraud exists (the fraud triangle)?
- Pressure or incentives
- Opportunity
- Rationalization
What is the auditor’s primary responsibility for noncompliance with laws and regulations?
Laws and Regulations Auditor’s Primary Responsibility
Direct effect Obtain sufficient appropriate audit evidence
regarding material amounts and disclosures
No Direct effect Perform specified procedures to identify
noncompliance that may materially affect the
financial statement
