Ch 9 - Materiality and Risk Flashcards Preview

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Flashcards in Ch 9 - Materiality and Risk Deck (19):

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified audit opinion has been issued.

Acceptable audit risk


The process of assigning to each balance sheet account the misstatement amount considered to be material for that account based on the auditor's preliminary judgment.

Allocation of the preliminary judgment about materiality


A complement to acceptable audit risk; an acceptable audit risk of 2% is the same as audit assurance of 98%; also called overall assurance and level of assurance.

Audit assurance


A formal model reflecting the relationships between acceptable audit risk (AAR), inherent risk (IR), control risk (CR), and planned detection risk (PDR); PDR = AAR / (IR * CR)

Audit Risk Model


What is the equation for the audit risk model?

PDR = AAR / (IR * CR)


A measure of the auditor's assessment of the risk that a material misstatement could occur in an assertion and not be prevented or detected on a timely basis by the client's internal controls.

Control Risk


The risk that the auditor or audit firm will suffer harm because of a client relationship, even though the audit report rendered for the client was correct.

Engagement Risk


A measure of the auditor's assessment of the susceptibility of an assertion to material misstatement before considering the effectiveness of internal control.

Inherent risk


Specific misstatements in a class of transactions or account balance identified during the audit.

Known misstatements


Misstatements that arise from either differences between management's and the auditor's judgment about estimates of account balances or from projections of misstatements based on the auditor's test of a sample from a population.

Likely misstatements


The magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.



The materiality amount(s) for segments of the audit, set by the auditor at less than materiality for the financial statements as a whole.

Performance materiality


A measure of the risk that audit evidence for a segment will fail to detect misstatements that could be material, should such misstatements exist.

Planned Detection Risk


The maximum amount by which the auditor believes that the statements could be misstated and still not affect the decisions of reasonable users; used in audit planning.

Preliminary judgment about materiality


A change in the auditor's preliminary judgment made when the auditor determines that the preliminary judgment was too large or too small.

Revised judgment about materiality


The acceptance by auditors that there is some level of uncertainty in performing the audit function.



The risk that the financial statements are materially misstated prior to the audit (IR * CR)

Risk of material misstatements


Results because the auditor has sampled only a portion of the population.

Sampling error


The application of performance materiality to a sampling procedure (AICPA standards) or the materiality allocated to any given account balance (PCAOB standards).

Tolerable misstatement