Ch. 6 - Planning and risk assessment Flashcards
(6 cards)
According to ISA 200, what are the overall objectives of the auditor?
To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and
To report on the financial statements, and communicate as required by the ISA’s, in accordance with the auditor’s findings.
What are the key requirements for the auditor to obtain reasonable assurance and to express an opinion of the financial statements?
Ethics: Comply with relevant ethical requirements.
Professional scepticism: Plan and perform an audit with professional scepticism, recognising that circumstances may exist that cause the financial statements to be materially misstated.
Professional judgement: Exercise professional judgement in planning and performing an audit.
Sufficient appropriate audit evidence and audit risk: Obtain sufficient appropriate audit evidence to reduce audit risk to an acceptably low level thereby enabling reasonable conclusions to be drawn by the auditor for their audit opinion.
What is the formula for calculating Audit Risk?
What does Audit Risk (and each of the components that calculate Audit Risk) mean?
Audit Risk = (Inherent Risk x Control Risk) x Detection Risk
Audit Risk - The risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated.
Inherent Risk - The susceptibility of an assertion about a class of transaction, account balance or disclosure to a misstatement that could be material (individually or aggregated), before consideration of any related controls.
Control Risk - The risk that a misstatement that could occur in an assertion and that could be material (individually or aggregated) will not be prevented, or detected and corrected, on a timely basis by the entity’s controls.
Detection Risk - The risk that procedures performed by the auditor to reduce the audit risk to an acceptably low level will not detect a misstatement that exists and could be material (individually or aggregated).
What is meant by the ‘Risk of material misstatement’?
The risk that the financial statements are materially misstated prior to audit. Consisting of inherent risk and control risk. This occurs when there is a reasonable possibility (likelihood) and being material if it were to occur (magnitude).
What are the two levels of risks of material misstatement that the auditor must determine the impact of and design suitable responses for?
- Risks of material misstatement at the financial statement level: This could affect many assertions (e.g. Operating losses and cash flow problems, poor information systems, concerns about the integrity of management, increased risk of fraud at the FS level).
- Risks of material misstatement at the assertion level: The auditor focuses on assertions about a class of transactions, an account balance or a disclosure and considers the inherent risk and control risk separately in their assessment.
What is the link between the ‘spectrum of inherent risk’ and ‘significant risks’?
The assessment of inherent risk requires professional judgement by the auditor to determine the likelihood and magnitude of the risk. The resulting combination is evaluated and the higher it gets, the higher the assessment of inherent risk (both likelihood and magnitude do not need to be assessed as high in order for an assessment to be considered high).
The higher end of the spectrum of inherent risk are considered to be significant risks and will therefore demand more of the auditor’s attention and will therefore be prioritised. Significant risks may be considered key audit matters (KAMs). Significant risks are a matter of professional judgement taking issues such as subjectivity and complexity into account.
