Term
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Definition
| Audit Risk = Inherent Risk (IR) * Control Risk (CR) * Detection Risk (DR) |
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Term
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Definition
probability that an audit team will give an inappropriate opinion on F/S
material misstatement occurs (IR)
would not be caught by client controls (CR)
not detected by audit procedures (DR) |
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Term
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Definition
| in absence of internal controls, material errors or frauds could enter the accounting system |
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Term
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Definition
| dollar size of account, liquidity of account, volume of transactions, complexity of transactions, subjective estimates |
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Term
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Definition
| the clients internal control policies will fail to prevent or detect material misstatements |
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Term
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Definition
| audit procedures will fail to detect material misstatements |
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Term
| Audit Risk Model Examples |
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Definition
1. Cannot have IR = 0
2. Cannot have CR = 0
3. No due care if AR=.32
4. Cannot rely on substantive procedures alone
inverse relationship between RMM and DR
auditors modify the nature, timing, and extent |
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Term
| Risk of Material Misstatement (RMM) |
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Definition
| inherent risk and control risk |
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Term
| Two general tests to detect material misstatements |
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Definition
test of details
substantive test of analytical procedures |
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Term
| Analytical Procedures Risk |
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Definition
| risk that substantive analytical procedures will fail to detect a material misstatement |
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Term
| f) Three steps are involved in the auditor’s use of the audit risk model at the account balance, class of transactions, or disclosure level |
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Definition
(1) Setting a planned level of audit risk
(2) Assessing the risk of material misstatement
(3) Solving the audit risk equation for the appropriate level of detection risk. |
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Term
| SAS 99: Consideration of Fraud in a Financial Statement Audit |
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Definition
design audit to provide reasonable assurance of detecting fraud that could have a material effect on F/S
-understand fraud
-assess fraud risks
-design audits to provide reasonable assurance
-fraudulent financial reporting
-misappropriations of assets |
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Term
| Consideration of Fraud in a F/S Audit |
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Definition
Step 1: Audit Team Discussion
Step 2: Identify Information Necessary to assess fraud risks
Step 3a: Identify fraud risk factors related to fraudulent F/R
Respond to assessed Risks
Step 5: Evaluate Audit Evidence
Step 6: Communicate fraud matters
Step 7: Document Fraud matters |
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Term
| Step 1: Audit Team Discussion |
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Definition
- update team members on aspects of the audit
- topics may include: past experiences with client, how fraud may be perpetuated, procedures that might detect fraud |
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Term
| Step 2: Identify Information Necessary to Asses Fraud Risks |
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Definition
- gather information to identify fraud risk factors
- procedures may include: discussions with members of management, internal auditors, and other employees
- compare reported f/s against estimates |
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Term
| Step 3a: Identify Risk Factors Related to Fraudulent Financial Reporting |
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Definition
misleading f/s through: overstating revenues and assets, understating expenses and liabilities, and giving disclosures that are misleading
- may show financial performance ratios that are more favorable to current industry |
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Term
| Step 3b: Assess Fraud Risks |
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Definition
| - assess fraud risk, the likelihood fraud has occurred, magnitude of the fraud risk, and how widespread the threat is |
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Term
| SAS 57: Auditing Accounting Estimates |
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Definition
| - monitor differences between managements estimates and reasonable estimates supported by audit evidence |
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Term
| Step 4: Respond to Assess Risks |
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Definition
-SAS 99: use less predictable audit procedures
- more extensive tests, target tests to specific areas |
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Term
| Step 5: Evaluate Audit Evidence |
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Definition
| - if discrepancies in accounting records, conflicting evidence, and missing documentation --> follow up with management to identify source of problem |
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Term
| Step 6: Communicate Fraud Matters |
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Definition
- report to management one level above
- exercise technical and professional due care
- SAS 114: requirements intended to ensure audit committees are informed about the scope and results of the audit |
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Term
| Step 7: Document Fraud Matters |
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Definition
- discussions of engagement personnel
- procedures to identify and assess risk
- specific risks identified and responses |
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Term
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Definition
- information is material if it is likely to influence f/s users decisions
- auditors must examine quantitative and qualitative factors
- absolute size, relative size, nature of item/issue, circumstances, cumulative effects |
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Term
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Definition
1. Inspection of records and documents
2. Inspection of tangible assets
3. Observation
4. Inquiry
5. Confirmation (sas 67)
6. Recalculation
7. Reperformance
8. Analytical Procedures |
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Term
| Materiality Quan vs. Qual |
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Definition
Quantitative: absolute size, relative size, cumulative effects
Qualitative: nature of item/issue, circumstances, uncertainty |
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