What are the two types of material misstatement risks?
Inherent risks and control risks
What are the two types of detection risks?
Sampling risks and non sampling risks
How do you calculate the audit risk?
Audit risk = inherent risk x control risk z detection risk
What is audit risk?
The risk that the auditor expresses an inappropriate opinion on the financial statements. Audit risk comprises the risk of material misstatement and detection risk.
What is the risk of material misstatement?
The risk that the financial statements are materially misstatement period to the audit commencing
What is inherent risk?
The susceptibility of an assertion about transactions, balances or disclosure to a misstatement which could be material, assuming there were no related internal control
What is control risk?
The risk that a misstatement is not prevented, detected or corrected by the entity’s internal control systems
What is a detection risk?
The risk that the procedures performed by the auditor do not detect a misstatement that exists and could be material
What is a sampling risk?
The risk that the conclusion drawn from the sample would be different if the whole population would of be tested
What is a non sampling risk?
The risk of drawing the wrong conclusion for other reasons
What is professional scepticism?
an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to fraud or errors and a critical assessment of audit evidence
What is professional judgement?
Application of relevant training, knowledge and experience in making informed decisions about the course of action that are appropriate to the unique circumstances of the audit engagement
What is misstatement?
A difference between the amount, classification prevention or disclosure
What is materially?
Misstatements, including omissions are considered to be material if they individually or in the aggregate could reasonably be expected to influence the economic decisions of users taken on the basis of financial statements
What is the % for revenue for materially?
1/2 - 1% revenue
What is the % for profit for materiality?
5-10% of profit
What is the % of total assets for materiality?
1-2% of total assets
What are items material be nature?
Compliance with laws and regulations
Compliance with debt covenants
Turn a profit into a loss
Transactions with directors
What is performance materiality?
An amount set at less than materiality for its FS as a whole, to reduce the risk that the aggregate of smaller misstatements in individual account balances or classes or transactions could exceed materiality
What is the purpose of risk assessment?
Identify areas of the financial statements where misstatements are likely to occur early in the audit
What are some risk assessment procedures?
Enquiries with management
What should the auditor know about the clients environment?
Laws and regulations
Other external factors
What should an auditor know about the entity?
Operations Ownership and governance Structure and finance Accounting policies Objectives and strategies System of internal control
What is the definition of analytical procedures?
Evaluations of financial informations through analysis of plausible relationships among both financial and non financial data and investigation of possible fluctuations, inconsistent relationships or amounts that differ from expected values
How are analytical procedures used in the planning stage?
Assist in assessing risks of material misstatement in order to provide a basis for designing and implementing responses to assessed risks