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15 Cards in this Set
- Front
- Back
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What are some of the inquiries that the successor auditor should make of the predecessor auditor?
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1) Information might bear on integrity of management
2) Disagreement with management about policies, procedures, etc. 3) Reason behind change of auditors 4) Communication to mgmt about significant deficiencies and material weaknesses in internal control. |
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What are the preliminary engagement activities an auditor must make?
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1) Decide whether to do the audit
2) Issue engagement letter |
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What is audit risk?
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The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially stated.
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Why do we have to plan an audit?
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A. Aids in efficient allocation of time:
1. Spend a lot of time with accts/assertions that are likely to be misstated 2. Spend little time with acct/assertions that are unlikely to be misstated. 3. Assess likelihood or risk of material misstatement. B. Smooth the audit with respect to client preparation of workpapers. C. Required by GAAS (least important reason) |
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What are the 4 steps in audit planning?
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1) Pre-engagement activities
2) Assess materiality + risk & control risk 3) Perform preliminary analytical procedures 4) Prepare audit program |
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What is an engagement letter?
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A form of document that is used to formalize the arrangements reached between the auditor and the client.
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What is inherent risk?
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Risk of material misstatement assuming the company has no control.
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What is control risk?
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Risk that company's controls will not detect an existing material misstatement.
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What is detection risk?
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Risk that the auditor does not detect existing material misstatement.
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What is materiality?
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Something is material if it's omission or misstatement likely affect a user's judgement or decision.
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What is tolerable misstatement?
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Amount of misstatement that can exist in account and the account be deemed fairly stable.
- Amount assigned to an acct is that acct's tolerable misstatement. The lower the # of TM, the more likely the misstatement is material. |
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What's the formula for PDR?
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PDR = AAR/IR x CR
Planned Detection risk = Acceptable Audit Risk/ Inherent risk + Control risk. |
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How does the Audit risk model work?
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1.) Set a Goal or planned level of audit risk = AAR (acceptable audit risk)
2) Assess Risk of material misstatement (RMM) (IR x CR) 3) Find the planned detection risk (PDR) using AAR/ IR X CR. Ex: PDR = .125 means we need to be .875 or 87.5 % confident! |
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The lower the PDR, the more confidence is required in the auditor's testing and more evidence that is needed.
True or False. |
True.
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If the Risk of material misstatement increases (RMM - made up of IR and CR), what happens to PDR?
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The planned detection risk would go down meaning we need to be more confident and gather more evidence for material misstatements.
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