Week 1 Flashcards
What is agency risk
the risk that managers are not acting in the best interest of shareholders (external auditors mitigate this risk)
how to set materiality
- identify users
- identify users objectives and sensitivities
- determine base (assets, revenues, expenses)
- identify threshold (1-3% of rev/exp; 1-3% of assets)
- overall materiality
- performance materiality (60-80% of materiality)
what is audit risk
the risk that the auditors express an inappropriate opinion
inherent risk
the risk of misstatement and fraud without considering other issues (inventory is susceptible to theft, significant estimates, complex transactions)
control risk
the risk that the controls of the company don’t catch an error (outdated GL system, lack of segregation of duties, no internal audit, poor mgmt attitude)
detection risk
the risk that testing will no catch a misstatement
fraud triangle
- incentives and pressures
- opportunity
- rationalization
different approaches to an audit
substantive - rely on tests and details
combined - test controls and details (reduce details by relying on controls)
PPE is recognized if
- it is likely to bring future economic benefits
- the cost can be measured reliably
asset costs include
- purchase price plus non-refundable taxes,
- costs to bring asset to use (delivery, installation)
- estimated dismantling costs
soft costs on land/building purchase
capitalize commission, legal fees, title search, property taxes
three options for depreciation
- straight line: cost less residual value
- declining balance: cost of asset less depreciation rate
- units of production: estimate total units, divide by amount produced
revenue recognition IFRS
- identify the contract
- identify the performance obligation
- determine the price
- allocate the transaction price
- recognize revenue when each obligation is satisfied
rev rec ASPE
- risks and rewards of ownership have been transferred
- revenue can be measured reliably
- collection is reasonably assured
