Shared Flashcard Set

Details

Chapter 9
Materiality and Risk
24
Accounting
Graduate
01/08/2013

Additional Accounting Flashcards

 


 

Cards

Term
What are the eight steps in
audit planning?
Definition
1. Accept client and perform initial audit planning
2. Understand the client’s business and industry
3. Assess client business risk
4. Perform preliminary analytical procedures
5. Set materiality and assess acceptable audit risk and inherent risk
6. Understand internal control and assess control risk
7. Gather information to assess fraud risks
8. Develop overall audit planning and audit program
Term
Audit Reports: Audit Opinions: SQUAD
Definition
S Standard unqualified
Q Qualified
U Unqualified/WITHs
A Adverse
D Disclaimer
Term
The seven parts in a standard audit report (TAI SO NaughTy)
Definition
T Title of the report
A Address
I Introductory paragraph
S Scope paragraph
O Opinion paragraph
N Name of the CPA firm
T Time of the report
Term
Audit Report:
Introductory paragraph (ASMA)
Definition
a. We have AUDITED
b. Client’s financial STATEMENTS (statements listed)
c. Financial statements are the responsibility of MANAGEMENT
d. The AUDITOR’S responsibility is to express an opinion
Term
Audit Report:
Scope paragraph (GRAB)
Definition
a. Audit conducted in accordance with GAAS in the USA
b. GAAS requires that we plan and perform the audit to provide REASONABLE assurance that financial statements are free of material misstatement
c. AUDIT involves - (TAPE)
1. Examining, on a TEST basis, evidence supporting amounts and disclosures
2. Assessment of ACCOUNTING principles
3. Evaluation of overall PRESENTATION
4. Assessment of significant ESTIMATES
d. Audit provides reasonable BASIS for opinion
Term
Materiality
Definition
The magnitude of an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced.
Term
The five-step process of applying materiality
Definition
Step 1: Preliminary judgment about materiality
Step 2: Allocate preliminary judgment about materiality to segments - Planning extent of tests
Step 3: Estimate total misstatement in segment
Step 4: Estimate the combined misstatement
Step 5: Compare combined misstatement with judgment about materiality - Evaluating results
Term
Preliminary judgment about materiality – Concept
Definition
The maximum amount by which the auditor believes the statement could be misstated and still
not affect the decisions of reasonable users.
Term
Factors affecting preliminary judgment about materiality
Definition
1. Materiality is a relative rather than an absolute concept
2. Bases are needed for evaluating materiality
3. Qualitative factors also affect materiality
4. Contractual obligations can cause minor misstatements to be material
5. Trends in earnings can cause otherwise immaterial events to be material
Term
Regular bases for preliminary judgment about materiality:
Definition
Income before Taxes, Sales, Assets, etc.
Term
Allocate preliminary judgment about materiality to segments – Concepts
Definition
(1) Auditors accumulate evidence by segments rather than for the financial statements as a whole
(2) Most practitioners allocate materiality to balance sheet rather than income statement – never both statements at the same time.
(3) Tolerable misstatement – When auditors allocate the preliminary judgment about materiality to account balances, the materiality allocate to any given account balance is referred to as tolerable misstatement.
Term
Factors affecting the allocation of preliminary judgment about materiality to segments:
Definition
(1) Auditors expects certain accounts to have more misstatements than others
(2) Both overstatement and understatement must be considered.
(3) Relative audit costs affect the allocation.
Term
Why? - Allocating preliminary judgment about materiality to segments
Definition
(1) To help the auditor decide the appropriate evidence to accumulate for each account on both statements.
(2) To minimize audit costs without sacrificing audit quality.
(3) To ensure that, when the audit is completed, the combined misstatements in all accounts is less than or
equal to the preliminary judgment about materiality.
Term
How? Estimate misstatement and compare with preliminary judgment – Steps 3-5 of the 5-step process.
Definition
(1) Step 3: The auditor uses the identified misstatements to estimate the total likely misstatement in a segment (i.e. an “estimate,” a “projection,” or an “extrapolation.”)
(2) Step 4: The projected misstatement amounts for each account (i.e. segment) are combined on the worksheet.
(3) Step 5: Compare combined likely misstatement is compared with preliminary judgment about materiality.
Term
Audit risk model
Definition
PDR = AAR/(IR x CR)

Where PDR = Planned detection risk (A)
AAR = Acceptable audit risk (B)
IR = Inherent risk (C)
CR = Control risk (D)
Term
Planned detection risk PDR (A):
Definition
A measure of the risk that audit evidence for a segment will fail to detect misstatements exceeding a tolerable amount, should such misstatements exist.
Term
Acceptable audit risk AAR (B):
Definition
A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued.
Term
Inherent risk IR (C):
Definition
A measure of the auditor's assessment of the likelihood that there are material misstatements in a segment before considering the effectiveness of internal control. (Ah, folks, that means regardless or despite internal controls!)
Term
Control risk CR (D):
Definition
A measure of the auditor's assessment of the likelihood that misstatements exceeding a tolerable amount in a segment will not be prevented or detected by the client's internal controls.
Term
Engagement risk:
Definition
Risk that auditor or audit firm will suffer harm after the audit even though the audit report was correct
Term
Factors affecting engagement risk:
Definition
(1) The degree to which external users rely on the statement – Explain
(2) The likelihood that a client will have financial difficulties after the audit report is issued – Explain
(3) The auditor’s evaluation of management integrity – Explain
Term
Factors affecting inherent risk
(Client JIM’s Non-routine transactions of Related parties Results in Fraudulent financial reporting and misappropriation of assets)
Definition
(1) Nature of the client business
(2) Judgment required to correctly record account balances and transactions
(3) Initial versus repeat engagement
(4) Makeup of the population
(5) Non-routine transactions
(6) Results of previous audits in
(7) Fraudulent financial reporting
(8) Misappropriation of assets
Term
Factors affecting control risk CR –
Definition
(1) Effectiveness of internal controls
(2) Planned reliance on internal controls
Term
Preventive measures – Observations from the practice
Definition
(1) Proper staffing – Audit engagement, based on the level of risks, may require more experience staff.
(2) Proper documentation – No matter what level of risks have been assessed, CPA firms need to document the following audit files to ensure adequate review has taken place:
a. auditor’s planning,
b. evidence accumulation and conclusions, and
c. other matters in the audit.
Supporting users have an ad free experience!