SU 3 Planning And risk Assessment Flashcards
What is control risks?
The risk that internal control will not prevent, detect, or correct a material misstatement in a timely manner.
What is detection risk?
The risk that the procedures performed by the auditors to reduce audit risk to an acceptably low level will not detect a material misstatement.
Inverse relationship
When one value increases, the other value decreases. Ex: when risk of material misstatement is high, then acceptable detection risk is low.
What are the 3 levels of materiality?
- Financial statement level
- Particular acct balances, disclosures or classes of transactions
- Performance materiality
What is Business risk?
Results from
1. significant factors that could adversely affect an entity’s ability to achieve its objectives
2. Setting inappropriate objectives and strategies
Primary Purpose of Customer price index (CPI)
Compare price changes overtime. It’s Computed by the DOL.
What is the law of Supply and demand?
In general the law of supply and demand dictates that when price increases, demand decreases.
Inelastic demand
When the percentage change in quantity demanded is less than the percentage change in price demand is inelastic.
Example: 5% price increase results in a 3% decrease in quantity demanded
The percentage change in quantity demanded is less than the percentage change in price.
Elastic demand
When the elasticity of a product is greater than 1, demand is elastic. Elastic demand means that as the price increases, the decrease in demand is larger than the price increase.
What does detection risk relate to?
The nature, timing and extent of audit procedures. Ex: performing an audit at an interim date vs year end increases detection risk. Because a misstatement may not be detected.
Detection risk fact
As RMMs increase, the acceptable level of detection risk decreases. The audit then needs more substantive procedures.
Fact
The cost of correcting misstatements is not considered when determining if uncorrected misstatements are material.
Inherent risk for the entity
The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material.
Examples of inherent risk for the entity
- Complex calculations
- Amounts with significant estimation uncertainty
- Business risk ex: technology advances that make products obsolete
- Management fraud or bias
- Emerging issues
What makes misstatements and omissions material?
Misstatements and omissions are material if it is likely that they would influence judgement made by a reasonable user of the statements.
Factual misstatement
No doubt exists
What is involved in Planning an Audit?
Planning an audit includes developing an overall strategy and an audit plan. This includes obtaining an understanding of an entity and its environment including its internal control to identify and assess the RMM.
Demand curve vs Supply curve
Demand: the impact of price on products purchased.
Supply: the impact of price on products offered.
What are analytical procedures applied as Risk assessment procedures used for?
planning the audit.
Analytical procedures used to form an overall conclusion include:
Reading the FS and considering:
1. The adequacy of evidence gathered in response to unusual or unexpected balances.
2. Unusual or unexpected balances or relationships not previously detected.
What is demand?
The amount of a good or service that consumers are willing and able to buy at various prices during the period.
What is supply?
The amount of a goods that producers are willing and able to offer at various prices during a specified period.
The audit plan includes
1) The nature and extent of risk assessment procedures
2) the nature timing and extent of further audit procedures at the assertion level
3) other procedures required by GAAS
Inconsistent fluctuations or relationships or significant differences result in what 3 things?
- Additional audit procedures
- Inquiries of management
- Corroboration with other evidence
Internal control questionnaires
Document the auditors understanding of internal control.
