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
