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5 Cards in this Set
The omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.
Concerns surrounding Risk Based Auditing
-If we say someone is low risk they can use this to detect fraud
-need unpredictable tests
-Auditors are not good at assessing risk
-Risk needs constant reassessment throughout the audit process
-Independence issues, like with WorldCom
-WorldCom made topside JE's
Audit Risk – the risk that the auditor may unknowingly fail to appropriately modify his or her opinion on financial statements that are materially misstated (AU 312.02).
Auditor Business Risk – the risk that an auditor incurs loss or injury to his or her professional practice from litigation, adverse publicity, or other events arising in connection with financial statements audited and reported on (AU 312.02, fn 2).
Client Business Risk – the risk that an audit client’s economic condition will deteriorate in the future.
Objective of the new ASB risk assessment standards
Enhancing auditors’ application of the audit risk model by requiring
1-a more in-depth understanding of the audited entity and its environment, including its internal control;
2-a more rigorous assessment of the risks of where and how the financial statements could be materially misstated;
3-improved linkage between the auditor’s assessed risks and the nature, timing and extent of audit procedures performed in response to those risks.
These eight standards (effective 12/15/06) should help standardize audit practice and create greater consistency in audit performance .
Qualitative Materiality Factors
SEC Staff Accounting Bulletin No. 99 - Materiality
-arises from an item capable of precise measurement or from an estimate
-masks change in earnings or other trends
-hides failure to meet analysts’ expectations
-changes loss to income
-concerns a segment/division that has a significant role in the consolidated entity
-affects compliance with regulatory requirements
-affects compliance with loan covenants
-increases management’s compensation
-involves concealing an illegal act