Chapter 7 Flashcards
(29 cards)
Audit risk
Risk that auditor expresses inappropriate audit opinion when the FS is MM
Audit risk component (2)
- RMM
- Detection risk
Inherent risk
Susceptibility of an assertion to a MM before considering the effectiveness of a client’s internal control
Control risk
RMM in an assertion that is not prevented/detected on a timely basis
Detection risk (2)
- Risk that auditor don’t detect MM
- You want to make it low, by working hard
Audit risk model
(Inherent risk + Control risk) x Detection risk
RMM & Detection risk relation
Negative
Inherent risk factor (5)
- Complexity
- Subjectivity
- Change
- Uncertainty
- Susceptibility of misstatement due to bias
Type of complexity (4)
- Regulatory
- Business model
- Applicable financial reporting framework
- Transaction
Type of Subjectivity
- Applicable financial reporting framework
Type of change (6)
- Economic conditions
- Customer loss
- Industry model
- Business model
- Application financial reporting framework
- Regulatory
Type of Uncertainty
Reporting
Type of Susceptibility of misstatement due to bias (2)
- Reporting
- Transaction
After identifying OFSR (2)
- Determine whether the risk affect the assessment of risks at the assertion level
- Evaluate the nature and extent of their pervasive effect on the FS
Pervasive risks (6)
- Poorly trained / inexperienced staff
- Significant control deficiencies
- History of ongoing losses and liquidity problem
- Past misstatement, history of error, significant amount of adjustment
- RMM due to fraud
- Concern over management integrity
Significant Risks (3)
- High likelihood and high magnitude
- Require special attention
- Varies from entity to entity
Examples of significant risk (5)
- Transaction with a lot of subjectivity
- Accounting estimates with high uncertainty and complex models
- Account balance and disclosures with complex calculations
- Accounting principle that may be subject to differing interpretation
- Change in business that results in change in accounting (like merger and acquisitions)
Objective significant risk (2)
- Non-routine related-party transaction
- Presumption of fraud in revenue cycle
Overall Risk Response (6)
- Assign more experience staff
- Encourage heightened level of professional skepticism
- Increase involvement of audit partners and managers
- Closer supervision and review
- Incorporate more unpredictability
- Consider if changes need to be made to the overall audit strategy
Risk response at assertion level (2)
- Tests of controls
- Substantive audit procedure
Fraud risk assessment (4)
- Discuss with audit team of RMM due to fraud
- Make inquiries to management
- Look for weird relationship in analytical procedures
- Evaluate risk for revenue fraud and management override
Discussions Among the Audit Team (4)
- Which area is more susceptible to MM due to fraud
- How management could perpetrate and conceal fraudulent financial reporting
- How anyone might misappropriate assets of the entity
- How auditor respond to susceptibility of MM due to fraud
Inquiries of Management, Those in Charge of Governance, and Others
- Does management know of any fraud in the company?
- Inquire on management process
- Inquire on the risk of fraud
- Inquire on internal audit view to see of they have detected any fraud yet
Factor for fraud to be likely happening
- Incentive/pressure
- Opportunities (related to control)
- Attitude/rationalization
