Auditing - Chapter 4

Intentional misstatements that can be classified as fraudulent financial reporting and/or misappropriation of assets.

Fraud

Formula for DR

DR = AR / RMM

What are the three components of the fraud triangle?

1 - Incentive or pressure to perpetrate fraud 2 - Opportunity to carry fraud out 3 - Attitude or rationalization to carry out fraud

Misstatements may be of two types. What are they?

1 - Known 2 - Likely

Fraud can be classified into two types. What are they?

1 - Misstatements arising from fraudulent financial reporting 2 - Misstatements arising from the misappropriation of assets

What are the three steps of using the AR model?

1 - Set a planned level of audit risk 2 - Assess RMM by evaluating the entity's business risks and how those could lead to material misstatements 3 - USE AR equation to solve for the appropriate level of detection risk

What are the three parts of nonsampling risk?

1 Inappropriate audit evidence 2 Failure to detect when using appropriate audit evidence 3 Misinterpretation of audit results

Evaluations of financial information made through analysis of plausible relationships among both financial and nonfinancial data.

Analytical Procedures

The formula for Audit Risk

AR = RMM X DR

Specific acts performed by the auditor in gathering evidence to determine if specific assertions are being met.

Audit Procedures

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

Audit risk

Risks resulting from significant conditions, events, circumstances, and actions or inactions that could adversely affect management's ability to execute its strategies and to achieve its objectives, or through the setting of inappropriate objectives or strategies.

Business Risks

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 individual or aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the internal control

Control Risk

The auditor has little or no control over what risk(s)?

Control Risk, Inherent Risk

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 individual or aggregated.

Detection Risk

The risk that the auditor is exposed to financial loss or damage to their reputation from llitigation, adverse publicity, or other events arising in connection with financial statements audited and reported on.

Engagement Risk

Unintentional misstatements or omissions of amounts or disclosures.

Errors

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

Inherent Risk

Detection risk and risk of material misstatement have what kind of relationship?

Inverse

__________ misstatements arise from differences between the auditor's judgments concerning accounting estimates and management's estimates that the auditor considers unreasonable or inappropriate,

Likely

An attitude that includes a questioning mind and a critical assessment of audit evidence. The auditor should not assume that management is either honest or dishonest.

Professional Skepticism

The formula for risk of material misstatement

RMM = IR X CR Inherent risk x control risk

The identification, analysis, and management of risks relevant to the preparation of financial statements that are fairly presented in conformity with GAAP.

Risk assessment

The auditor's combined assessment of inherent risk and control risk.

Risk of Material Misstatement

Refers to the nature, timing, and extent of audit procedures. Nature - type of evidence Timing - when the evidence will be gathered Extent - how much of the type of evidence will be evaluated

Scope of the Audit

A risk of material misstatement that is important enough to require special audit consideration.

Significant Risk