Chapter 3-Auditing - AuditRisk financialstateme

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Chapter 3-Risk Assessment Audit Risk -Audit Risk – risk that the auditor may unknowingly fail to appropriately modify the opinion on  financial statements that are materially misstated  - Audit Risk  -the risk that the auditor will  issue an unqualified opinion on materially misstated  financial statements  -Auditor is concerned with audit risk at the financial statement level as well as at the more  detailed level including account balance, class of transaction, or disclosure level  -Assertion- consideration of audit risk at the lower levels such as account balance, class of  transaction, or disclosure level  -Audit risk is the  combination of the chance that the client’s financial statements will  contain  material misstatements and that  the auditor will fail to detect any misstatements  - Audit risk can be  directly controlled by manipulating  detection risk  -The auditor  manipulates detection risk by changing the scope (nature, timing, and extent)  of the  auditor’s test procedures  -Auditors accept some level of risk in performing the audit.
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-An effective auditor recognizes that  risks exist, are  difficult to measure, and  require  careful thought to respond.  o Gain an understanding of the client’s business and industry and assess client  business risk  (remember the second standard of fieldwork ).   - Use the audit risk model to further identify the  potential for misstatements and where they are  most likely to occur * Professional skepticism -state of mind that the auditor must be in that includes a  questioning  mind and a  critical assessment of audit evidence  Fair presentation is not guaranteed. Some risk still exists. Responsibility is limited to MATERIAL  financial information. Materiality and risk are fundamental to planning the audit and designing the approach. Factors affecting Acceptable Audit Risk o The  degree to which external  users rely on the statements;
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o The  likelihood that a  client will have financial difficulties  after the audit report is  issued o The auditor’s  evaluation of management’s integrity Methods Practitioners Use t o Assess Acceptable Audit Risk Factors Methods Used to Assess Acceptable Audit  Risk Likelihood of financial difficulties Analyze financial statements for difficulties using ratios Examine inflows and outflows of cash flow statements Management integrity Client acceptance and  Continuance procedures
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External users’ reliance on Financial statements Examine financial statements Read minutes of the board Examine form 10K Discuss financing plans with management Audit Risk Model
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