ACT 4497 Lecture ch09

ACT 4497 Lecture ch09 - Assurance Services and the...

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Unformatted text preview: Assurance Services and the Integrity of th Modern Auditing: Modern Auditing: Financial Reporting, 8 Edition California Polytechnic State University at San Luis Obispo William C. Boynton Portland State University Raymond N. Johnson Chapter 9 – Audit Risk, Including the Risk of Fraud Chapter 9 Overview Chapter 9 Overview Audit Risk – An Overview Audit Risk – An Overview • Concept of Audit Risk – Inverse of reasonable assurance – If 99% certainty is desired, the audit risk is 1% • Professional Judgment and Audit Risk – Usually audit firm policy – Comparable from one audit to another Fraud Defined Fraud Defined • Acts Resulting in Material Misstatements – Fraud or Error – Intentional or Unintentional • 2 Types of Misstatements Relevant to Fraud – Fraudulent Financial Reporting – Misappropriation of Assets The Fraud Triangle The Fraud Triangle Fraudulent Financial Reporting Fraudulent Financial Reporting • Incentives and Pressures • Opportunity • Attitudes and Rationalization Misappropriation of Assets Misappropriation of Assets • Incentives and Pressures • Opportunity • Rationalization Auditing for Fraud Auditing for Fraud • Risk Assessment Procedures • Brainstorming Session • Specific Risks Risk Assessment Procedures Risk Assessment Procedures • Inquiries of Management • Consider Unusual or Unexpected Relationships • Consider Other Information Brainstorming Session Brainstorming Session • Allow junior members to benefit from senior members • Allow more seasoned personnel a fresh set of eyes • Allows audit management to set the appropriate tone for the audit • Emphasize possibility of fraud existing in any audit Specific Risks Specific Risks • Improper Revenue Recognition • Management Override of Internal Controls Audit Risk Model Audit Risk Model • 3 Components of Audit Risk – Inherent Risk – Control Risk – Detection Risk • Illustrating the Model – AR = IR x CR x DR • Expanded Audit Risk Model – AR = IR x CR x AP x TD Risk Components Matrix Risk Components Matrix Assessing the Components of Audit Risk Assessing the Components of Audit Risk • Inherent Risk • Control Risk • Detection Risk Inherent Risk Inherent Risk • Inherent Risk Defined • Assessing Inherent Risk • Identifying Significant Inherent Risks Control Risk Control Risk • Control Risk Defined • Assessing Control Risk – Planned assessed level of control risk – Actual assessed level of control risk Detection Risk Detection Risk • Detection Risk Defined • Assessing Detection Risk – Planned acceptable level of detection risk Interrelationships among Materiality, Detection Interrelationships among Materiality, Detection Risk, and Substantive Audit Evidence Components of Preliminary Audit Components of Preliminary Audit Strategies • Assessed level of inherent risk • Planned assessed level of control risk • Planned assessed level of analytical procedures risk • Planned level of tests of details Three Basic Preliminary Audit Three Basic Preliminary Audit Strategies • Response to Lower Inherent Risks • A Lower Assessed Level of Control Risk • A Primary Substantive Approach Preliminary Audit Strategies and the Preliminary Audit Strategies and the Audit Risk Model Preliminary Audit Strategy Comparison Preliminary Audit Strategy Comparison ...
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This note was uploaded on 02/07/2011 for the course ACT 4497 taught by Professor Lewis during the Spring '11 term at Troy.

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