Auditing chapter 9

Risk assessment procedures

-Inquiries of management -Analytical procedures -Observation and inspection -Discussion among Engagement team member Other risk assessment procedure.

PDR=

AAR/(IR*CR)

AAR

Acceptable audit risk- 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 unmodified opinion has been issued.

Audit risk

Auditors accept some level of risk or uncertainty in performing audits

Materiality and audit risk

Considered together in planning the nature and extent of risk assessment procedures to be performed, identifying and assessing the risks of material misstatement, determining the nature, timing and extent of audit procedures, and evaluating audit findings.

CR

Control risk- A measure of the auditor's assessment of the risk material misstatement could occur in an assertion and not be prevented or detected by the client's internal controls.

Acceptable audit risk

Has an inverse relationship to evidence. If acceptable audit risk if reduced, planned evidence should increase.

Revising risks and evidence

If audit evidence suggests that the risk is higher than originally thought, the auditor must revise the original assessment and consider the effect of the revision on evidence requirements.

IR

Inherent risk- A measure of the auditor's assessment of the susceptibility of an assertions to material misstatement before considering the effectiveness of internal control.

PDR

Planned detection risk- A measure of the risk that audit evidence for a segment will fail to detect misstatements that could be material, should such misstatements exist.

Risk of material misstatement at the overall financial statement level

Refers to the risks that relate pervasively to the financial statements as a whole and potentially affect a number of different transactions and accounts.

Significant risk

Represents an identified and assessed risk of material misstatement that, in the auditor's professional judgement, requires special audit consideration.

Control risk

Risk that internal controls will not prevent or detect material misstatement.

Matters requiring significant judgement

Significant risks also relate to matters that require significant judgement because they include the development of accounting estimates for which significant measurement uncertainty exists.

Nonroutine transaction

Significant risks often relate to significant nonroutine transactions, which represent transactions that are unusual, either due to size or nature, and that are infrequent in occurrence.

Inherent risk

Susceptibility of an assertion to material misstatement

Audit risk for segments

The risk of material misstatement, control risk, and inherent risk are assessed for each audit objective in each segment of the audit.

Engagement risk

The risk that the auditor will suffer harm after the audit is finished, even though the report was correct.

Risk of Material Misstatement at the assertion level

There are two components to risk at the assertion level. 1. Inherent risk 2. Control risk