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Flashcards in Engagement Planning Deck (16):

Audit Risk

Audit should be deisnged to limit audit risk to an appropriate low level.
Audit risk = risk of material missatment x ris k auditor fails to detect misstatement.



inherent risk is evaluated to help an auditor assess

The susceptibility of a financial statement assertion to a material misstatement assuming there are no related controls.


Which of the following underlies the application of generally accepted auditing standards, particularly the standards of fieldwork and reporting?

The elements of materiality and audit risk.


decrease in acceptable levels of materiality requires the auditor to do one or more of the following:

(1) select a more effective auditing procedure, (2) perform auditing procedures closer to the balance sheet date, or (3) increase the extent of a particular auditing procedure. By increasing the extent of a procedure concerning an individual account and/or selecting a more effective procedure, the auditor will find the smaller misstatements that in aggregate might exceed his preliminary judgments about materiality. The auditor, therefore, must plan to find smaller misstatements as a lower acceptable level of materiality is established.


Three conditions that are generally present when individuals commit fraud are:

incentive/pressure, opportunity, and attitude/rationalization.


The “further audit procedures” that are designed are of two types—

substantive procedures and tests of controls. When the risk assessment is based on an expectation that controls are operating effectively, the auditor should perform tests of controls to provide evidence on whether those controls are operating effectively.


Which of the following procedures would an auditor most likely perform in the planning stage of an audit?

Make a preliminary judgment about materiality


An auditor’s engagement letter most likely would include a statement regarding

Management’s responsibility to provide certain written representations to the auditor.


As the acceptable level of detection risk decreases, the assurance directly provided from

Substantive procedures should increase.


Special Committee on Assurance Services (the Elliott Committee), defined assurance services

as independent professional services that improve quality of information, or its context, for decision makers.


responses to the risk of material misstatement due to fraud include

(1) assigning personnel with particular skills relating to the area and considering the necessary extent of supervision to the audit, (2) increasing the consideration of management’s selection and application of accounting principles, and (3) making audit procedures less predictable.


More due care

Critical review of the judgment exercised at every level of supervision.


What is performance materiality?

It will ordinarily be less than the FS materiality. The amount set by the auditor at less tahn materiality for the FS as a whole to reduce to an appropriately low level hte probability that the aggregate of uncorrected and undetected missatements exceeds materiality for hte FS as a whole.


When performing a FS audit, auditors are required to explicitly assess the risk of material missatement due to

FRAUD! Auditors must specifically assess the risk of material missatements due to fraud and consider that assessment in designing the audit procedures to be performed.


Under the Private Securities Litigation Reform Act of 1995, you got to:

deliver a report concenring the illegal acts of the SEC within 1 business day.


There are two types of peer reviews:

1) System review - a peer reviews the quality control of a cpa firm.

2) engagement review - reviewing the actual work, review, compilation, audit.