Flashcards in Workshop 4 - Audit Risk Deck (17):
What is audit risk?
Risk that an auditor expresses an inappropriate audit opinion when financial report is materially misstated.
What is the audit risk model?
AR = IR + CR + DR
DR = AR/(RRM = IR + CR)
What is inherent risk?
Identification of accounts and related assertions most at risk of material misstatement.
What is control risk?
Gaining an understanding of the client's internal controls and how they will prevent or detect a misstatement.
What is detection risk?
Risk that the auditor's testing procedures will not be effective in detecting material misstatement should there be one.
What is the relationship between detection risk and material misstatement?
What will occur to the detection risk if there is an increased amount of evidence collected?
There will be a decrease in the detection risk.
What are the stages in audit risk minimisation?
1. Assess inherent risk
2. Assess control risk
3. Auditor plans to undertake detailed testing of each identified account.
How to achieve a low detection risk?
Perform more rigorous substantive testing.
What are the limitations of the audit risk model?
Inherent risk is difficult to formally assess.
Audit risk is judgementally determined
Model treats each risk component as separate and independent when in fact, this is not the case
Audit technology is not so precise that each component of the model can be accurately assessed.
What is qualitative materiality?
Refers to the nature of the item.
- Non-compliance with laws
- Related party transactions
- Change of accounting methods
What is quantitative materiality?
Refers to the magnitude of the item.
- Set as a % of relevant base.
How do auditors set planning materially?
Set initially for the statements as a whole. Then allocate to individual accounts based on their susceptibility to misstatement.
What is the purpose of performance materiality?
Assess the risk of material misstatement and determine the nature, timing and extent of further audit procedures.
What is the purpose of planning an audit to a financial report?
Enable the auditor to obtain sufficient appropriate evidence
Keep audit costs reasonable
Avoid misunderstandings with the client
When will an auditor reduce their reliance on substantive testing?
When IR and CR are low and their is an increased reliance on the tests of controls.