Chapter 7 Planning The Audit: Identifying And Responding To The Risk Of Material Misstatement

Front 1

Audit risk

Back 1

The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

Front 2

Audit risk model

Back 2

A numerical depiction of the relationship between inherent risk, control risk, detection risk, and audit risk.

Front 3

Brainstorming

Back 3

A group discussion designed to encourage auditors to creatively assess client risks, particularly those relevant to the possible existence of fraud in the organization.

Front 4

Business risk

Back 4

Inherent risk at the financial statement level that affects the business operations and potential outcomes of organizational activities.

Front 5

Clearly trivial

Back 5

An amount that is clearly inconsequential, whether taken individually or in the aggregate and whether judged by an criteria of size, nature, or circumstances. This term is also referred to as posting materiality.

Front 6

Control risk

Back 6

The risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control.

Front 7

Detection risk

Back 7

The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

Front 8

Extent of risk response

Back 8

Refers to the amount of evidence that is necessary given the client's assessed risks, materiality, and the level of acceptable audit risk.

Front 9

Inherent risk

Back 9

The susceptibility of an assertion about a class of transaction, account balance, or disclosure to a misstatement that could be material, either individually or when aggregated with other misstatements, before consideration of any related controls.

Front 10

Materiality

Back 10

The magnitude of an omission or misstatement of accounting information that, in view of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.

Front 11

Misstatement

Back 11

An error, either intentional or unintentional, that exists in a transaction or financial statement account balance.

Front 12

Nature of risk response

Back 12

The types of audit procedures applied given the nature of the account balance and the most relevant assertions regarding that account balance.

Front 13

Performance materiality

Back 13

The amount or amounts set by the auditor at less than the materiality level for the financial statements as a whole or for particular classes of transactions, account balances, or disclosures.

Front 14

Posting materiality

Back 14

The amount below which errors are treated as inconsequential. This term is also referred to as clearly trivial.

Front 15

Ratio analysis

Back 15

An analytical technique that is useful in identifying significant differences between the client results and a norm (such as industry ratios) or between auditor expectations and actual results; ratio analysis is also useful in identifying potential audit problems that may be found in ratio changes between years.

Front 16

Risk of material misstatement

Back 16

Risk that exists at the overall financial statement level and at the assertion level, and within these levels risk can be categorized as involving inherent risk and control risk.

Front 17

Risk

Back 17

A concept used to express uncertainty about events and/or their outcomes that could have a material effect on the organization.

Front 18

Significant risk

Back 18

An identified and assessed risk of material misstatement that, in the auditor's professional judgment, requires special consideration.

Front 19

Timing of risk response

Back 19

Refers to when audit procedures are conducted and whether those procedures are conducted at announced or predictable times

Front 20

Tolerable misstatement

Back 20

The amount of misstatement in an account balance that the auditor could tolerate and still not judge the underlying account balance to be materially misstated.

Front 21

Trend analysis

Back 21

An analytical technique that includes simple year-to-year comparisons of account balances, graphic presentations, and analysis of financial data, histograms of ratios, and projections of account balances based on the history of changes in the account