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Flashcards in Week 4 Deck (12):

Audit Risk Model

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


Setting Audit Risk

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


Determining Inherent Risk

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


High Inherent Risk

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


Low Inherent Risk

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


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.

Internal Control


Internal Control Objectives Cover

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


Inverse relationship b/w RMM & DR

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

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


Materiality…not everything is important

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


CSA 320 Requirement

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


Steps for Determining Materiality

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?


2 key pieces to planning your audit strategy