Flashcards in Engagement Planning, Understanding Clients, and Assessing Risks - Wiley Deck (13):
What are the categories of assertions on financial statements?
1. Account balances
2. Classes of transactions
What are the types of financial statement assertions?
3. Rights and Obligations
4. Valuation and Allocation
When the acceptable level of detection risk decreases, what may an auditor do?
Postpone the planned timing of substantive tests from interim dates to the year-end (Timing)
Also, use of more effective substantive tests (Nature) and increasing the extent of the tests (Extent)
When the level of detection risk decreases, what is the result?
Assurance from substantive tests should increase.
Which audit risk components may be assessed in nonquantitative terms?
All 3, control, detection, and inherent risks (i.e. range of risk from minimum to maximum)
Also, all 3 can be stated quantitatively. (i.e. percentage)
How do inherent and control risk differ from detection risk?
They are a function of management, not under the auditor's control, and exist independently of the financial statement audit.
What would most likely be used to make determinations about materiality?
Anything that is annualized, since materiality mostly references annual amounts (i.e. net income)
NOTE: anticipated sample size of a planned substantive test is determined by materiality, NOT vice versa.
What is the mathematical relationship between control risk and detection risk ?
What is an audit risk and what is its function?
It's the risk that the auditor will issue inappropriate opinions when FSs are misstated.
It is the function of the risks of material misstatement and detection risk.
What is performance materiality and how does it compare to financial statement materiality?
Performance materiality is assurance that several immaterial amounts don't combine to a material, undetected misstatement. It is ordinarily less than FS materiality.
A decrease in the amount of tolerable misstatement in a class of transactions causes an auditor to do what?
1. Perform planned auditing procedure closer to the balance sheet date,
2. Select more effective auditing procedures or
3. increase the extent of a particular procedure.
What are auditors EXPLICITLY required to asses in regards to material misstatement?
Existence of fraud.
Note: auditor must also look for errors and illegal acts, but those are implicit, NOT explicit)