Week 4

Question 1

Audit Risk Model

Answer 1

So what:
“ Audit risk: probability that the audit fails to detect a material misstatement”

This will occur when:
There is a material misstatement to start with
Internal controls fail to detect & correct a material misstatement
The audit procedures fail to detect the material misstatement.

Audit Success = 1 – audit risk

Question 2

Setting Audit Risk

Answer 2

Controlled at a low level but not eliminated even in well planned & executed audits

No hard standard, it only says:
Should be appropriately low
Use professional judgment

2 driving facts:

• Legal Liability
• Number of Users

As these increase; planned level of audit assurance increases…so audit risk decreases

Question 3

Determining Inherent Risk

Answer 3

The likelihood of a material misstatement before considering internal controls
The nature of the situation
Will differ from
Economy to economy
 Industry to industry
Business to business

Question 4

High Inherent Risk

Answer 4

Competitive
Inexperienced staff
Geographically dispersed
Numerous f/x transactions
Many errors in prior yr audit

Question 5

Low Inherent Risk

Answer 5

Few competitors
Experienced staff
One location
No f/x transactions
Few errors in prior yr audit

Question 6

A process, effected by an entity’s board of directors, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting, and compliance.

Answer 6

Internal Control

Question 7

Internal Control Objectives Cover

Answer 7

Operational Efficiency
Preventing/Detecting Error and Fraud
Safeguarding Assets
Accurate, Reliable Information

Question 8

Inverse relationship b/w RMM & DR

Answer 8

High RMM is bad
Set your DR low, thus more work

Low RMM can rely
Set your DR high, so less work

Question 9

Materiality…not everything is important

Answer 9

Purpose:
Forces auditor’s to think about what is important to users
It guides the auditors in planning and performing the audit
CAS 320 planning & performing the audit
CAS 450 evaluating misstatements during the audit
Used in evaluating and forming an opinion on the financial statements
CAS 700 forming an opinion on the F/S

Question 10

CSA 320 Requirement

Answer 10

Materiality for the financial statements as a whole
Performance Materiality
If applicable, materiality level(s) for particular classes of transactions, account balances or disclosures

Question 11

Steps for Determining Materiality

Answer 11

1. Determine who the users are
2. Pick an appropriate benchmark. Consider nature of business, entity, finance structure, assets & liabilities
3. Determine whether you need to adjust – anything significant happen that year?

Question 12

2 key pieces to planning your audit strategy

Answer 12

Risk

Materiality