Term
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Definition
| "magnitude of an omission or misstatement of account information that, in the light of surrounding circumstances, makes it probable that the judgement of a REASONABLE person relying on the info. would have been changed or influenced by the omission or misstatement." |
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Term
| What two factors should the auditor consider? |
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Definition
| Quantitative (focused on more) and Qualitative |
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Term
| Ultimately materiality is a matter of ____. |
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Definition
| professional judgement (not simply a calculation) |
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Term
| materiality is relevant to the ____. |
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Definition
| client (Microsoft vs. Mister Jay's) |
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Term
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Definition
-calculations
-new numbers in calc. need to monitored each year
-Prof. judgement needs to be exercised when using calculations |
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Term
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Definition
| consider factors such as discovery of fraud, loan covenant violation, concealment of a change in earnings trend, profit vs. loss, etc. |
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Term
| define TOLERABLE MISSTATEMENT |
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Definition
| adding each piece of the $XXX materiality and break it up for each account (i.e., $100,0000 materiality for total Assets and allocating the materiality to individual asset accounts) |
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Term
| what is the Audit Risk Model? |
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Definition
AR = IR x CR x DR
AR = ROMM (IR x CR) x DR
(ROMM = Risk of Material Misstatement) |
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Term
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Definition
| risk that the auditor may FAIL TO MODIFY THE OPINION on f/s's that are materially misstated |
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Term
| define Inherent Risk (IR) |
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Definition
| the likilihood that, IN ABSENCE OF INTERNAL CONTROLS, a material misstatement could occur- in other words, it is a meaure of the susceptibility of an account to misstatement;it is assessed, we have no control over it |
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Term
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Definition
-dollar size (larger acct, greater risk)
-liquidity
-volume of transactions
-complexity (new acct. pronouncements)
-subjective estimates (difficult to audit) |
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Term
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Definition
| the likelihood that a material misstatement would NOT be caught by the client's internal controls; no controls = very high risk; auditor cannot lower CR |
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Term
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Definition
| The existence (or lack thereof) and effectiveness of control procedures |
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Term
| define Detection Risk (DR) |
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Definition
| the risk that a material misstatement would not be caught by audit procedures; CAN be worked down by the auditor to reduce total AR |
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Term
| factors affecting detection risk? |
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Definition
-nature, timing, & extent of audit procedures
-sampling risk
-non-sampling risk |
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Term
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Definition
| risk of choosing an unrepresentative sample |
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Term
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Definition
| risk that the auditor may reach inappropriate conclusions based upon the evidence |
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