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19 Cards in this Set
- Front
- Back
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What is Audit Risk?
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The Probability that the auditor fails to modify the opinion on financial statements that contain a material misstatement
(i.e., issues an unqualified opinion) |
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Does Audit Risk affect the application of GAAS?
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Yes
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Which two categories of GAAS are affected by audit risk and materiality?
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Field Work and Reporting
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What is another way to say what Audit Risk is?
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The risk the auditor won't modify the FS.
It is the risk the Auditor brings to the audit. |
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What two factors need to be considered together in designing the nature, timing, and extent of audit procedures and in evaluating the results of those procedures.
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Audit Risk and Materiality
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How is Audit Risk indicated in the auditor's report?
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By reference to Reasonable Assurance
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What does Reasonable Assurance mean?
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That audit risk cannot be reduced to zero probability, which would indicate absolute assurance.
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What is Materiality?
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A misstatement in the financial statements can be considered Material if knowledge of the misstatement would affect a decision of a reasonable user of the statements.
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What is the Basic Auditor responsibility?
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To Detect Material Misstatements!
To plan and perform the audit to obtain reasonable assurance that material misstatements, whether caused by errors or fraud, are detected. |
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What is the one over-riding audit planning objective?
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To limit audit risk to a Low Level
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When reducing Audit Risk to a low level, what four areas should be reduced to a low audit risk level?
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Determining the extent and nature of the auditor's risk assessment procedures
(how you go about assessing risk) 2. Identifying and assessing the risk of material misstatement 3. Determining the nature, timing, and extent of further audit procedures 4. Evaluating whether the financial statements taken as a whole are presented fairly in conformity with GAAP. |
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What considerations concerning audit risk and materiality are at the Financial Statement level?
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To keep audit risk at a low level
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What is Audit Risk a function of?
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3 Component Risks:
Inherent Risk, Control Risk, Detection Risk |
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What considerations concerning audit risk and materiality are at the individual account balance, class of transaction, or disclosure level?
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It is the audit risk model, meaning that audit risk is a function of 3 component risks: inherent risk, control risk, and detection risk.
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What is the Audit Risk model?
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AR = IR x CR x DR
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What SAS states the AR model?
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SAS 107
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What is Inherent Risk?
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The probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures.
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What is Control Risk
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The probability that a material misstatement that occurred in the first place would not be detected and corrected by internal controls that are applicable.
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What is Detction Risk?
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The probability that a material misstatement that was not prevented or detected and corrected by internal control was not detected by the auditor's substantive audit procedures (that is, an undetected material misstatement exists in a relevant assertion).
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