Flashcards in Deck 8 Deck (20):
The susceptibility of a relevant assertion to a material misstatement, assuming there are no related controls
(Client's accounting system has errors)
Risk that a material misstatement that could occur in a relevant assertion will not be prevented or detected on a timely basis by the entity's internal control
(Client's internal control does not catch the error)
Risk that the auditor will not detect a material misstatement that exists in a relevant assertion
Three ways to increase the assurance provided from substantive procedures
1. Change the nature of substantive tests from a less effective to a more effective procedure
2. Change the extent of substantive tests ( use larger sample size)
3. Change the timing of substantive tests (perform substantive tests at year-end rather than at interim)
Risk that misstatements will arise from fraudulent financial reporting or misappropriation of assets
What situation most likely represents the highest risk of a material misstatement arising from misappropriations of assets
A large number of bearer bonds on hand (because they are unregistered with no records kept of the owners or transactions)
What is the most difficult internal control issue for an auditor to detect?
Three types of fraud
1. Fraudulent financial reporting = lying
2. Misappropriation of assets = stealing
3. Corruption = cheating
What is the auditor's responsibility relative to fraud during an audit?
The auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud
In analyzing risk, the following four attributes should be considered?
1. Type of risk
2. Significance of the risk
3. Likelihood of the risk
4. Pervasiveness of the risk
Act of omission or commission by an entity, whether intentional or unintentional, which is contrary to prevailing laws and regulations
Involve comparison of recorded amounts to independent expectations developed by the auditor
What is the objective of test of details?
To ensure that sufficient audit evidence supports the planned level of assurance at the relevant assertion level
What is the objective of test of controls?
To evaluate whether a control operated effectively
What is always necessary in a financial statement audit?
Analytical procedures and risk assessment procedures
Assertion level risks
Risks that relate to specific transactions, account balances, and disclosures at the relevant assertion level
Financial statement level risks
Risks that relate pervasively to the financial statements as a whole and potentially impact many relevant assertions
Risks that require special audit consideration
(exist when inherent risk is exceptionally high)
Steps in assessing the risks of material misstatement
I: internal control
M: material misstatement risks
A: assessed level of risk
P: Perform substantive procedures
A: Audit evidence