1. Assessing the Risk of Material Misstatement
Chapter 9
Assessing the Risk of Material Misstatement

3. Annika
Under which auditing approach(es) are auditors required to obtain an understanding of the internal controls?

4. Selin
Which Auditing Standard requires auditors to obtain an understanding of the internal controls?

6. planning phase
we are always required to obtain an understanding of the Internal Control
to identify & assess the RoMM risks of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels through understanding the entity and its environment, including the entity's internal control, thereby to provide a basis for designing and implementing responses to the assessed RoMM.

7. Vikki
Under which audit approach(es) are auditors required to obtain sufficient appropriate audit evidence?

8. Bella
Which Auditing Standard requires auditors to obtain sufficient appropriate evidence?

9. AU-C 500 Audit Evidence
.04 The objective of the auditor is to design and perform audit procedures that enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion.

10. Ryan
How do we obtain audit evidence?

11. Rachel
What is the definition of audit risk?

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

13. What is the definition of Materiality?
Wendy
What is the definition of Materiality?

15. Performance Materiality
tolerable error
tolerable misstatement
The allocation of the preliminary judgment about materiality to segments (account balances or classes of transactions)

16. Weston Describe a Significant Class of Transactions ?
Describe a Transaction Cycle?

17. Class of Transactions
Accounts receivable xxx.xx
Sales xxx.xx
Revenue & Collection Cycle
Cash xxx.xx

18. Audit Risk Model

19. What are the elements of the “Audit Risk Model”?
Mark
What are the elements of the “Audit Risk Model”?

20. Risk of Material Misstatement
Materiality and Risk
Page 269 (237)
the Audit Risk Model
AAR = IR * CR * PDR
Risk of Material Misstatement
RoMM = combines IR * CR

21. Audit Risk Model

22. Sara Which Component(s) of Audit Risk are auditors able to reduce?
Which Component(s) of Audit Risk are auditors unable to reduce?

23. environmental
client
auditor

24. Obtain engagement
Understand the client AU-C 315
Analytical procedures
Understand the internal controls
Risk assessment
Testing AU-C 500
Tests of controls (transactions)
Substantive tests of transactions
Substantive Analytical procedures
Substantive tests of details of balances
Reporting AU-C 700

25. The mathematical relationship
Sophia
Describe the relationship between Control Risk and the planned level of Detection Risk?
The mathematical relationship

26. Lindsey
What type of audit procedures will we perform to obtain appropriate evidence that controls are effective?

27. Monica
What type of audit procedures will we perform to reduce Detection Risk to a low level?

29. What is the definition of Control Risk
Simran
What is the definition of Control Risk

30. Control risk. 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 individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control.

31. Matt
What is the definition of
Planned Detection Risk

32. Planned Detection risk
Planned Detection risk. The risk that the audit evidence for a segment will fail to detect misstatements exceeding tolerable misstatement.

33. Detection 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 individually or when aggregated with other misstatements.

34. Benjamin
If we assess CR = Low, what does that tell us about the level of PDR …. ?
If we assess CR = High, what does that tell us about the level of PDR …. ?

35. Edreese
If we assess CR = Max, what does that imply about the effectiveness of the Internal Controls?

36. Kevin
If we assess CR = Low, what does that imply about the effectiveness of the Internal Controls?

37. Kyle
If we assess Control Risk as Low, what type of evidence would our audit procedures need to generate?

38. Mikayla If PDR = High, what does that imply about Control Risk …. ?
If PDR = Low, what does that imply about Control Risk …. ?

39. preliminary Control Risk assessment significant classes of Transactions
occur
complete
accuracy
classify
cutoff
Credit sales
Low
Max
Cash receipts
Payroll
Cash Disburse
Purchasing

40. when we assess Control Risk less than Max
Credit Sales Transactions
Control
activity
Test of
Control Proc
Results
Of ToC
Occur Low
Complete Low
Accuracy Low
Classification Low
Cutoff Max
Max

41. High Risk Areas and Transactions

42. 1. Related Party Transactions
2. Non Routine Transactions
3. Judgement -Actg Estimates
4. Complex Transactions

43. 1. Related Party Transactions
high risk

44. Related Party Transactions
high risk - page 228 & 276 (196 & 244)
any party with which the audit client deals, where one of the parties can influence the management or operating policies of the other.
Related parties can structure transactions to conceal problems in the financial statements

45. 2. Non Routine Transactions
high risk

46. 3. Judgement -Actg Estimates

48. Auditing accounting estimates
high risk
p. 268 (245) (judgment required)
Keep track of differences

49. Auditing accounting estimates
With estimates, there often is no right answer
Keep track of differences between the estimate and what auditor finds reasonable
Evaluate differences taken together

51. 4. Complex Transactions
high risk
page 220 (188) - ENRON

52. Greg
What is the definition of
Professional Skepticism ?

53. An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence.

58. Evaluation of Sample Results
Critical Value = μ + Zβ* Sx/√n
2, *1, / √ 44 = 2,513.42
We are unable to conclude that Accounts Receivable is not materially overstated because the sample mean of $2, is less than the $2, critical value.