Class 3 - Risks and Controls

Question 1

Audit risk

Answer 1

the risk the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Does not include the risk the auditor might express an option that the financial statements are materially misstated when they are (insignificant)

composed by material misstatement risk and detection risk

Question 2

material misstatement risk

Answer 2

the risk that financial statements are material misstated before the audit

composed by inherent risk and control risk

Question 3

inherent risk

Answer 3

the susceptibility of an assertion about a class transaction, account balance or disclosure to a misstatement that could be material either in agreggate or invidually beofre consideration of any related controls.

it is higher for certain assertions that have complex computations, estimations, tech advances (inventory)

Question 4

control risk

Answer 4

the risk that misstatement of account balances, clas transactions or disclosures could be material individually or in agreggate with other misstaments will not be prevented, detected and corrected by internal controls

Question 5

detection risk

Answer 5

risk that the auditor’s procedures to reduce audit risk will not detect a misstatement that individually or in aggregate with other misstatements can be material

Question 6

test of controls

Answer 6

an audit procedure designed to evaluate the operating effectiveness of controls in preventing or detecting material misstatements at the assertion level

Question 7

Control Testing

Answer 7

design - check if the control individually or in aggregated with other controls os capable of effectively preventing, detecting and correcting material misstatements

implementation - involves considering that he control exists and that the entity is using it

Question 8

controls and types

Answer 8

action taken by the management to prevent or detect or correct material misstatements

preventing controls - prevent an error from occuring that would result in a misstatement

detective controls - detect and correct an error that would result in a misstament

Question 9

Operating effectiveness

Answer 9

factors to consider when testing operating effectiveness of controls

type - procedures used to obtain audit evidence

extent - the quantity to be performed

timing - when the audit procedures will be performed