Unit 3 Flashcards
What is Control Risk?
Risk that Internal controls will not detect material misstatement.
What is Inherent Risk?
Risk that financial statements will contain material misstatement. Does not include internal controls.
What is Detection Risk?
Risk that auditors detection services will not find material misstatement.
What is Inherent Risk based on? Name 7.
- Competition
- Economic envrionment
- types of products
- tech obsolescence
- gov’t regulation
- accounting policies
- size of organization
- employee experience
- earnings pressure
- extent of errors in previous audits -
When is Inherent Risk High?
- Highly competetive (FS Manipulation)
- High estimations (more mistakes/bias)
- First time audit (undected misstatement)
- High turnover (no familiarity)
When is Inherent Risk Low?
- Client is well established (less pressure)
- audited for many years (not likely to have undetected misstatement)
- experienced staff (less mistakes, more familiarity)
When is Control Risk High?
- More reliance on detection risk
- Outdated financial reporting system (unreliable = misstatement
- Lack internal audit function (may not be aware of deficiencies)
- Relaxed attitude towards IC
- Owner does not get involved (won’t monitor staff = relaxed = overlook IC)
- Focused on customer service (overlook IC)
- No IT policy (overlook IC)
When is Control Risk Low?
- Up-to-date financial reporting system (reliable)
- IT policies in place (employees understand how to behave)
- Back up financial data (able to recover if compromised)
How can Detection Risk be reduced?
Reduced by increasing amount of intensive, detailed testing performed over financial accounts.
What is the effect on Detection Risk if Inherent and Control risk are high and you want Audit Risk to be low?
Detection Risk will be low, which means more reliance on detailed substantive procedures (intense testing) because there is less reliance on internal controls.
What is the effect on Detection Risk if Inherent and Control risk are low and you want Audit Risk to be low?
Detection Risk will be high, which means there will be less reliance on substantive procedures (intense testing) but there will still be testing. More reliance on internal controls.
What is Fraud Risk?
- Assess risk of material misstatement for fraud.
- Fraud is intentional act to obtain illegal advantage using deception.
- can arise frm fradulent financial reporting or missapropriation of assets.
- Identify both increasing and decreasing factors of fraud.
What are the 6 examples of Financial Reporting Fraud?
- Improper assert valuations
- Timing differences
- Understating expenses
- Unrecorded liabilities
- Recording fake sales
- Inappropriate application of accounting principles
What are examples of Missapropriations of Assets (Theft)?
- Use company CC for personal purchases
- Theft of inventory
- Unauthorized discounts or refunds to customers
Prevention of Fraud = ?
Detection of Fraud = ?
= Procedures avoiding fraud
= procedures uncovering fraud
