M8 Flashcards
(10 cards)
Define a material misstatement
An omission or misstatement of accounting information that makes it probable a reasonable person relying on the information would have would have been influenced by the omission or misstatement.
What are the 3 types of misstatements
Factual misstatements (misstatements about which there is no doubt)
Judgemental misstatements (differences arising from the judgements of mgmt)
Projected misstatements (the auditors best estimate of misstatements)
What is the audit risk model formula
AR = RMM * DR
May be assessed quantitatively or qualitatively
What is RMM and DR?
RMM is risk the F/S are materially misstated
DR is the risk the auditor will not detect such misstatements
When does a risk of material misstatement exist?
When there is a reasonable possibility of a misstatement occurring and if it were to occur there is a reasonable possibility of it being material.
What is inherent risk and what are factors that affect it?
Inherent risk is the susceptibility of an assertion about a class of transactions, such as
Complexity
Subjectivity
Change
Uncertainty
Susceptibility to mgmt bias
Factors that may increase inherent risk include
Tech that renders a product obsolete
Lack of WC
Decline in the overall economy
Control risk
Risk that a material misstatement will not be prevented or detected on a timely basis
When the auditor plans on relying on internal controls, the CR is low
When the auditor sees no effective controls or the controls are ineffective or sufficient evidence may be obtained only through substantive testing the CR is at it’s max level and RMM will be equal to IR
What is the relationship between RMM to DR
inverse
If the acceptable level of detection risk decreases, how will this affect substantive tests
Substantive tests will increase if the acceptable level of detection risk decreases.
