Chapter 3 Section 3: Audit Risk Flashcards
What is audit risk?
The risk that the auditor may unknowingly fail to appropriately modify the opinion on financials that are materially misstated
What do misstatements include?
Inaccuracies Departures from GAAP Omissions Incorrect estimates or judgments Inappropriate selection or application of policies
What are factual misstatements?
Misstatements about which there are no doubt
What are judgmental misstatements?
Differences arising from the judgments of management concerning estimates that the auditor considers unreasonable or inappropriate
What are projected misstatements?
Auditor’s best estimate of misstatements in populations from when you take your misstatement from the sample and extend it out
What is the audit risk model?
Risk that the auditor will issue the wrong opinion
What’s the formula for Audit Risk?
AR = RMM x DR RMM = IR x CR
What is inherent risk?
The susceptibility of a relevant assertion to a material misstatement assuming there are no related controls.
The risk that the client’s system has errors
What is control risk?
The risk that a material misstatement that could occur in a relevant assertion will not be prevented or detected and corrected on a timely basis by the entity’s internal control
The risk that the client’s system doesn’t catch errors
What is detection risk?
The risk that the auditor will not detect a material misstatement that exists in a relevant assertion
The risk that the auditor misses the mistake
What is the only risk an auditor controls?
Detection risk
What type of relationship do RMM and DR have?
Inverse
