Risk Assessment Procedures

Test of Controls

Substantive Procedures

Types of Audit Tests

Risk Assessment Procedures + Examples

Def- Used to

obtain an understanding of the entity and its environment, including its internal control

Audit Tests

Test of Controls

Directed toward the evaluation of the effectiveness of the design and operation of internal controls

Includes 1. inquiry 2. observation 3. inspection 4. walkthrough 5. reperformance

Audit Tests

Substantive Procedures

a.     Detect material misstatements in a transaction class, account balance, and disclosure component of the financial statements

b.     Include both analytical procedures and test of details of transactions and account balances

Tests for errors or fraud in individual transactions

1.     Trend analysis

2.     Ratio analysis

3.     Reasonableness analysis

- is the risk that audit tests do not uncover existing exceptions in the sample. 2 causes

1.     Auditor’s failure to recognize exceptions

2.     Inappropriate or ineffective audit procedures

The element of uncertainty that enters into the auditor’s conclusions anytime sampling is used. 3 important factors in determining sample size

1. risk of incorrect rejection

2. risk of incorrect acceptance

1.     Risk of Incorrect Rejection (Type 1)

a.     Stating that a control is ineffective when it really is

b.     Related to the efficiency of the audit

1.     Risk of Incorrect Acceptance (Type 2)

a.     Stating a control is effective when it’s really not

b.     Related to the effectiveness of the Audit

c.      Overreliance

d.     Control risk too low