Week 3 Flashcards
Lecture 2 (14 cards)
What’s the planning process?
Audit Risk > Audit Strategy > Audit Plan > Design Audit Procedures
What’s Audit Risk?
The risk that the auditor issues an incorrect audit opinion.
What’s the objective of an Auditor
Identify and assess the risk of material misstatement through understanding:
- Entity + environment
- Entity’s internal control
What’s misstatement?
In short, an error.
A difference between what’s reported in the financial statements item compared with financial reporting framework.
What’s materiality
When something (misstatements/omissions) can influence the economic decisions of users.
Name 2 things to consider to understand an entity’s high risk areas
- Industry and vulnerabilities
- Business type (product/location)
- Government or law regulations
- Recent financial performance
- Internal controls/accounting systems
What’s an internal control?
Procedures that an entity has in order to prevent fraud and protect assets.
What does it mean when a business has good internal controls?
Less chance of a risk.
What’s inherent risk?
The risk that there are errors regardless of internal controls.
eg: nature of industry or complex accounting
What’s control risk?
Risk that a client’s internal controls will fail to prevent or detect material errors or frauds.
What’s detection risk?
The risk that audit procedures fail to detect a material misstatement.
2 things to do to alter detection risk
- Have a more experienced audit team
- More intensive review process
- Larger sample size
- Change audit procedures
- Do more detail substantive testing than analytical
- Increase professional scepticism of audit team members
What’s professional scepticism?
An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence.
