2. Audit Risk (AU-C 200) Flashcards

1
Q

Define “Audit Risk”.

A

The risk that the auditor expresses an inappropriate audit opinion when the FS are materially misstated.

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2
Q

Audit risk is a function of what 2 things?

A
  1. the risks of material misstatement

2. detection risk

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3
Q

Define “risk of material misstatement”.

A

The risk that the FS are materially misstated prior to the audit.

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4
Q

What are the 2 components of material misstatements?

A
  1. inherent risk
  2. control risk
    Both are controlled by the entity not the auditor.
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5
Q

Define detection risk.

A

The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

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6
Q

Define control risk.

A

The risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s internal control.

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7
Q

Define Inherent risk.

A

The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.

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8
Q

Define substantive procedures.

A

An audit procedure designed to detect material misstatements at the assertion level. It comprise tests of detail and substantive analytical procedures.

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9
Q

What is the equation for audit risk?

A

audit risk = inherent risk x control risk x detection risk

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10
Q

What is the difference between inherent and control risk vs detection risk?

A

inherent and control risk exist independently of the audit.

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11
Q

What does detection risk relate to?

A

the effectiveness of the auditor’s procedures.

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12
Q

Audit risk, which may be assessed in quantitative or nonquantitiative terms, consists of what 2 things?

A
  1. the risk that an account and its related assertions contains material misstatements (composed of 2 components, referred to as inherent and control risk)
  2. the risk that the auditor will not detect such misstatements (referred to as detection risk)
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