Week 4 Flashcards
Lecture 2
What is the definition of Audit Risk?
The risk that the auditor issues an incorrect audit opinion.
Audit risk encompasses the overall risk of material misstatement in financial statements and the risk that the auditor fails to detect such misstatements.
What is Inherent Risk?
The risk of errors regardless of internal controls.
Inherent risk exists due to the nature of the business and its environment.
What is Control Risk?
The risk that a client’s internal controls will fail to prevent or detect material errors or frauds.
Control risk is influenced by the effectiveness of the internal control system.
What is Detection Risk?
The risk that audit procedures fail to detect a material misstatement.
Detection risk can be reduced by increasing the effectiveness of audit procedures.
What is Strategic Risk?
The threat of the business not achieving its stated goals/objectives.
Strategic risk can arise from various factors, including market changes and operational issues.
What are the objectives of Internal Controls?
Ensuring:
* Completeness
* Accuracy
* Validity
* Timeliness
* Safeguarding of assets
* Prevention and detection of fraud and error
Internal controls are crucial for maintaining the integrity of financial reporting.
Fill in the blank:
The risk of material misstatement is higher if there is a _______.
new accounting system where internal controls have not yet been tested.
What is the consequence of management being entitled to a bonus based on profit figures?
Audit risk = profit could be overstated.
This creates an incentive for management to manipulate financial statements.
What are arithmetic and accounting controls?
Reviewing calculations on invoices.
These controls help ensure the accuracy of financial records.
What does segregation of duties refer to?
Having multiple staff involved in a process.
This helps prevent fraud and errors by ensuring no single individual has control over all aspects of a transaction.
What is a limitation of Internal Controls?
You can never fully rely on Internal Controls!
Limitations include human error, fraudulent collusion, and management override.
What is required in the auditor’s testing of internal controls?
Auditor needs to check that all sales discounts have been authorized by Sales Manager.
This involves sampling sales invoices and verifying signatures to assess control effectiveness.
What does ISA 265 communicate?
Deficiencies in internal control to those charged with governance and management.
The report includes deficiency/problem, consequence, and recommendation.
What is the risk associated with a client having an ongoing legal case?
Audit risk = the financial statements could be prepared on an incorrect basis because of the going concern issue.
Legal issues may impact the company’s financial stability.
What does the term ‘going concern risk’ refer to?
The risk that the company may not be able to continue its operations in the foreseeable future.
This assessment is critical for accurate financial reporting.
