Mod 2A Notes.pdf - Mod 2.1 Sunday 4:30 PM A material misstatement is information in the financial statements that is sufficiently incorrect that it may

Mod 2A Notes.pdf - Mod 2.1 Sunday 4:30 PM A material...

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A material misstatement is information in the financial statements that is sufficiently incorrect that it may impact the economic decisions of someone relying on those statements. For example, a material misstatement of revenue could trigger a decision to buy a company's stock , causing losses for the investor when the misstatement is later corrected and the price of the stock declines. When an auditor finds a material misstatement and management does not correct it, the auditor should evaluate the effect of the misstatement on the financial statements and decide whether it is necessary to modify his or her audit opinion . Audit Risk Model : A formal model reflecting the relationships between acceptable audit risk (AAR), inherent risk (IR), control risk (CR), and planned detection risk (PDR); PDR = AAR/(IR × CR) 1. 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 unqualified audit opinion has been issued. 2. Control Risk: A measure of the auditor’s assessment of the risk that a material misstatement could occur in an assertion and not be prevented or detected on a timely basis by the client’s internal controls. 3. Engagement risk: The risk that the auditor or audit firm will suffer harm because of a client relationship, even though the audit report rendered for the client was correct. 4. Inherent risk: A measure of the auditor’s assessment of the susceptibility of an assertion to material misstatement before considering the effectiveness of internal control. 5. 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; PDR = AAR/(IR × CR) 6. Preliminary judgement about materiality: The maximum amount by which the auditor believes that the statements could be misstated and still not affect the decisions of reasonable users; used in audit planning 7. Risk: the acceptance by auditors that there is some level of uncertainty in performing the audit function 8. Control environment: the actions, policies, and procedures that reflect the overall attitudes of top management, directors, and owners of an entity about internal control and its importance to the entity. 9. Compensating control: A control elsewhere in the system that offsets the absence of a key control.
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