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ACC 4010 - Auditing > Chapter 4 > Flashcards

Chapter 4 Flashcards

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1
Q
A
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2
Q

What is business risk?

A

Risk from conditions/events affecting an entity’s ability to achieve objectives.

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3
Q

What does this describe: Risk from conditions/events affecting an entity’s ability to achieve objectives?

A

Business risk

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4
Q

What is audit risk?

A

Risk of giving a clean opinion when FS are materially misstated.

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5
Q

Can audit risk be fully eliminated?

A

No, there is always some level of audit risk.

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6
Q

What does this describe: Risk of giving a clean opinion when FS are materially misstated?

A

Audit risk

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7
Q

How is audit risk reduced?

A

By identifying key risks and focusing on high-risk FS areas.

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8
Q

What is inherent risk?

A

Chance of FS misstatement before considering internal controls.

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9
Q

What does this describe: Chance of FS misstatement before considering internal controls?

A

Inherent risk

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10
Q

What is control risk?

A

Chance that the company’s system won’t catch FS misstatement.

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11
Q

What does this describe: Chance that the company’s system won’t catch FS misstatement?

A

Control risk

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12
Q

What is detection risk?

A

Chance that audit procedures won’t detect a misstatement.

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13
Q

What does this describe: Chance that audit procedures won’t detect a misstatement?

A

Detection risk

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14
Q

What is materiality in auditing?

A

Information that impacts decision-making of FS users.

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15
Q

What does this describe: Information that impacts decision-making of FS users?

A

Materiality

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16
Q

What is performance materiality?

A

Buffer to ensure misstatements don’t exceed overall materiality.

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17
Q

What is specific materiality?

A

Materiality focused on specific audit areas with high RMM.

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18
Q

What are analytical procedures?

A

Used to identify unusual fluctuations and reduce audit risk.

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19
Q

What is trend analysis?

A

Comparison of account balances over time to identify movements.

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20
Q

What is common-size analysis?

A

Comparing accounts with a base like sales to find fluctuations.

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21
Q

What is ratio analysis?

A

Evaluating relationships between FS balances to assess performance.

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22
Q

What affects the reliability of data for analytical procedures?

A

Internal controls, accounting methods, budget reliability, and benchmarks.

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23
Q

What are the three factors that influence the acceptable level of audit risk?

A

Number of users that are relying on the financial statements
Any going concerns issues
Past concerns about the management’s integrity or competence

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24
Q

What is a widely acceptable level of audit risk?

A

5%

meaning that the auditors are wiling to accept 5% probability material misstatement exists

Aka they are seaking 95% confidence level that no material misstatement exists.

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25
When is the audit risk % set?
It is set at the beginning of the audit and is constant throughout
26
What is the relationship between the audit risk and confidence level
It has an inverse relationship, the lower the audit risk the higher the confidence level needs to be
27
Can an audit risk change throughtout the duration of an audit?
No
28
Can an audit risk change from year to year even if its at the same company?
Yes
29
What does RMM stand for?
Risk of material misstatement
30
What is audit risk comprised of (three risks)
Inherent risk, control risk, and detection risk
31
What is the only risk auditors can control?
They can only control the dection risk, inherent and control risk are out of their control
32
What is the relationship between RMM and detection risk?
There is an inverse relationship. RMM (inherent risk & control risk) when high, there will be a low detection risk (they will be more careful) Aka when the clients financials are more risky, the auditor will work harder to make sure nothing is missed. If the financials look safe the auditor wont need to work as hard.
33
If inherent risk and control risk is assessed as high, what is the detection risk?
The detection risk would need to be LOW to achieve an acceptable low level of audit risk
34
If RMM is assessed as low, what would the detection risk be?
The detection risk can be assessed as high, meaning that the auditor can reduce the amount of assurance required from audit tests
35
What are the steps in assessing the risk of material misstatement (RMM)?
Step 1: assessing inherent risk Step 2: assessing control risk
36
What is involved in step 1 of assessing RMM? (assessing inherent risk)
Assessing inherent risk is done at both: The FS level considering the nature of the business, industry, and previous experience with the clients AND at the assertion level for each FS item
37
What is involved in step 2 of assessing RMM? (sessing control risk)
Determine if the client has controls in place to minimize RMM for each inherent risk the auditor has identifed as high risk
38
What are examples of significant risks?
Fraud, going concern, changes in accounting standards, complex transactions, management estimates that have a lot of uncertainty
39
What are some responses that may happen to address audit risk from RMM?
emphasizing the need for professional skepticism and judgement on the audit team Assigning more experienced staff to the audit team & increasing supervision of the audit increasing the amount of sites visits Changing the nature, timing, and extent of audit procedures
40
What are the types of audit strategy?
Substantive audit strategy Comnbined audit strategy
41
What is substantive audit strategy?
focuses on solely substantive procedures (audit tests)
42
What is combined audit strategy?
focuses on both tests of internal controls and substantive procedures (audit tests)
43
Is assessing RMM the same as audit risk?
No they are not the same, audit risk is determined for the audit as a whole (big picture). Whereas RMM can vary by FS line item and assertion.
44
How is an audit strategy determined?
The audit strategy is determined based on the auditors preliminary inherent and control risk assessment (overall assessment of RMM).
45
What are the aspects that are determined when setting up an audit strategy?
Setting the scope, timining, and direction of the audit
46
Are substantive procedures (audit tests) just needed under conbined audit strategy?
No, audit tests (substantive procedures) are needed for both substantive audit strategy and combined audit strategy.
47
When should you choose the substantive audit strategy?
When inherent and control risks are high (therefore the detection risk is low, meaning more audit work is needed) When the auditor understands the clients internal controls but does not test them. (exception, if there are any significant risks, the auditor must identify and report control weaknesses)
48
When should you choose a combined audit strategy?
When contril risk is assessed as low, and testing internal controls is cost effective. If controls work well the auditor can do less audit tests (substantive testing) If the controls dont work, the auditor must report issues and do more substantive testing
49
When is information considered material?
If it impacts the decision making process of users who rely on FS
50
What does materiality include?
Information that is misstated or omitted but should be disclosesd in FS
51
What is materiality based on?
it is based on the auditors assessment of the needs and sensitivities of the users of the FS
52
Is there one right materiality level?
No, it changes for each client and all depends on the auditors professional judgement
53
When is information considered quantitatively material?
if it exceeds the auditors preliminary materiality assessment
54
What does the level of materality affect?
The quantity and quality of evidence an auditor needs to gather if the materiality level is set lower, the auditor must do a lot more work, if materiality is higher less work is needed
55
Can the materiality level change during the course of an audit?
yes, if something big happens during the audit (like a part of the business is sold) the auditor might need to change the materiality level
56
What is qualitative materiality?
Qualitative factors are considered whether the information is material or not (sometimes information can be considered due to its nature)
57
What are examples of qualitative materiality?
Misstatement due to fraud is significant regardless of magnitude Changes in accounting policies Related party transactions outside of normal course of operations
58
How is materiality used in the planning stage?
Preliminary materiality is used to determine which areas of the audit should be focused on and the extent of the audit work required Guides audit planning and testing
59
How is materiality used in the execution stage?
Materiality is used to evaluate misstatements found and determine the extent of any additional required audit work
60
How is materiality used in the reporting stage?
Materiality is used to evaluate aggregate of uncorrected misstatements on FS and impact the audit opinion
61

ACC 4010 - Auditing (8 decks)

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