Module 13 Flashcards
What is audit risk?
The risk that the auditor gives the wrong opinion on the financial statements when the financial statements are materially misstated
What is a risk based approach?
where the auditor tailors the nature, extent and timing of audit procedures performed on each area according to the risk of misstatement in that area.
Why is it a risk based approach?
- deliver the highest quality in the given time or given fee
- ensure adequate evidence is collected
what is materiality?
considered tone material if its omission would reasonably influence the economic decisions of the users taken on the basis of the financial statements .
What are the two reasons an item can be material?
- size
- nature, i.e. director remuneration
Why does an auditor require evidence?
to give an option on whether the accounts give a true and fair view
What are the methods of gathering evidence?
- understanding the entity
- testing the controls
- testing the numbers
What are the three components of audit risk?
Inherent risk, control risk, detection risk
What is inherent risk?
susceptibility of financial statement accounts to material misstatement, irrespective of internal controls
What is control risk?
risk that entitys controls wont prevent of detect misstatement
What is detection risk?
auditors procedures wont pick up misstatement
What are the two sources of inherent risk?
- Business risk
- Account specific risk - non-routine, complex transactions
what are the two categories of risk?
- financial statement - going concern
- assertion level risk - just specific area
When is inherent risk assessed?
at the start -planning
gets evidence by understanding the entity
When is control risk assessed?
systems and controls stage
