Risk Flashcards
(19 cards)
Which Statement of Auditing Standard section relates to Risk
SAS No. 107
Audit Risk - definition
The risk that an AUDITOR may unknowingly fail to appropriately modify his opinion on financial statements that are materially misstated.
How is audit risk indicated in the auditor’s report?
A statement of reasonable assurance, meaning that risk cannot be reduced to zero.
Reasonable assurance - definition
High level of assurance with a low level of audit risk
What is the basic responsibility of the auditor?
Properly plan and perform the audit to obtain reasonable assurance that material misstatements are detected.
Audit risk formula
Inherent risk * Control risk * Detection risk
Inherent risk - definition
Probability that a material misstatement would occur in the audited area in the absence of any internal control policies.
Control risk - definition
Probability that a material misstatement that occurred in the first place would not be detected and corrected by internal controls that are applicable.
Detection risk - definition
Probability that a material misstatement that was not detected by internal control was not detected by the auditor’s substantive audit procedures.
Risk of material misstatement formula
Inherent risk * Control risk
Which level of risk is specifically the auditor’s responsibility?
Detection risk is the only component risk that fits this category.
How is detection risk changed by the auditor?
Changing the nature, timing, and extent of audit procedures adjusts this risk level.
Purposes of analytical procedures
Directs attention in planning
Form of substantive evidence during fieldwork
Required before final review
Types of misstatements that are relevant to the consideration of fraud
Fraudulent financial reporting
Misappropriation of assets
Fraudulent financial reporting
Financial statements are intended to deceive the users
Misappropriation of assets
False entries intended to conceal the theft of assets
Does failure to detect a material misstatement imply a substandard audit?
No, auditor may be unable to detect misstatement due to forgery, collusion, or upper management involvement
What conditions are most commonly associated with fraud? (Fraud triangle)
Incentives/pressure
Opportunity
Attitude/rationalization
When is an auditor allowed to breach confidentiality?
Under subpoena
Must comply with legal and regulatory requirements
Successor auditor inquiries (when permission is granted by client)
Reporting fraud to an applicable funding agency (government auditing standards)
