Ch _3 Audit Risk & Materiality

Ch _3 Audit Risk & Materiality - ACCY 360/560"Audit...

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ACCY 360/560 "Audit Risk and Materiality" Chapter #3 I. Audit risk and materiality underlie every aspect of fieldwork and reporting A. We have a professional pronouncement on point, SAS 107,"Audit Risk and Materiality in Conducting an Audit" [Recall that these Statements on Auditing Standards (SASs) are “interpretations” of GAAS!] B. "Audit risk" defined "the probability that the auditor fails to modify the opinion (i.e., issues an unqualified opinion) on financial statements that contain a material misstatement"; hence audit risk and materiality are related by the definition of audit risk 1. At the financial statement-level (the “macro-level DT ) the one over- riding audit planning objective is to limit audit risk to an acceptably low level (as determined by the auditor’s judgment) 2. Reasonable assurance means that audit risk cannot be driven to zero (the costs would exceed the benefits) 3. At the level of an individual audit area or for a particular class of transactions ( the “micro-level DT ) we have the "Audit Risk Model" AR = IR * CR * DR a. Inherent risk (IR) – the probability that a material misstatement would occur in the particular audit area in the absence of any internal control policies and procedures b. Control risk (CR) – the probability that a material misstatement that occurred in the first place would not be detected by internal controls that are applicable c. Detection risk (DR) – the probability that a material misstatement that was not prevented or detected by internal control was not detected by the auditor’s substantive audit procedures (and, hence, an unqualified opinion was issued on
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This note was uploaded on 04/22/2011 for the course ACCY 360 taught by Professor T during the Spring '08 term at Northern Illinois University.

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Ch _3 Audit Risk & Materiality - ACCY 360/560"Audit...

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