week 1 - audit 2 Flashcards
what are the 6 audit processes?
- get a detailed understanding of the business
- assess the quality of financial reporting systems
- check a sample of transactions
- review results, seek acceptable explanations for any unusual trends
- discussions with directors on any issues
- use judgment to consider the overall picture
ISA 315 - identifying and assessing the risks of material misstatement
when is it used?
- planning of an audit
- need to obtain business understanding
- material misstatement
- risk assessment
- internal controls
ISA 315 requires auditors to obtain business understanding about the following:
- industry and external factors
- applicable financial reporting framework
- nature of its entity
- business objectives, strategies, related risks
- internal controls
What is Detection Risk (DR)?
Detection risk is the risk that an auditor’s substantive procedures will not detect material misstatements in an assertion, either individually or when aggregated with other misstatements.
What factors influence Detection Risk (DR)?
Detection risk is a function of the effectiveness of substantive procedures and how well they are applied by the auditor.
What is the Risk of Material Misstatement (ROMM)?
ROMM is the risk that the financial statements are materially misstated before the audit takes place (ISA 200).
How is the Risk of Material Misstatement (ROMM) expressed mathematically?
ROMM = Inherent Risk (IR) × Control Risk (CR)
What is the audit risk formula?
Audit Risk (AR) = Inherent Risk (IR) × Control Risk (CR) × Detection Risk (DR)
What happens if Inherent Risk (IR) and Control Risk (CR) increase?
If IR & CR increase, Detection Risk (DR) must decrease, leading to an increase in substantive testing.
How are the three components of audit risk related?
There is an inverse relationship between the assessed levels of inherent and control risks and the level of detection risk that the auditor can accept.
