CACC521 CH07 part 1

CACC521 CH07 part 1 - 1 OBJECTIVE 1: DESCRIBE the...

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1 OBJECTIVE 1: DESCRIBE the conceptual audit risk model and its components , and EXPLAIN its usefulness and limitations in conducting the audit CAS 315, CAS 330 AUDIT RISK ASSESSMENT Audit risk is related to the INFORMATION RISK, it is the risk that materially misstated audited financial statements will go out to users. Assurance is the complement of audit risk Auditors strive to lower audit risk BY PERFORMING AUDIT WORK THAT GIVES a high level of assurance that the statements are fairly presented. AUDIT RISK IS ASSOCIATED WITH gathering evidence on the facts of the auditee’s economic reality—IT IS CREATED BY having less than all the possible corroborating audit evidence - Ex: With less corroborating evidence in a review engagement, the risk associated with it is higher than it is for an audit engagemen TO DEVELOP THE AUDIT WORK PROGRAMS, auditors need to assess risk specifically in audit- related terms: 1. inherent risk 2. control risk 3. detection risk THE TERM “RISK” SHOULD ALWAYS BE USED WITH A MODIFIER (INHERENT, CONTROL, AND SO ON) TO SPECIFY THE ONE YOU MEAN INHERENT RISK Inherent risk is the probability that material misstatements have occurred in 1. transactions within the accounting system used to develop financial statements, OR 2. an account balance Inherent risk is the risk of material misstatements occurring in the first place, and understanding the auditee’s business risk is important for assessing inherent risks Auditors do not create or affect inherent risk audit care should be greater WHERE INHERENT RISK IS GREATER auditors can only try to assess its magnitude based on prior experience, management bias, and nature of the transactions. The auditor will consider the characteristics of the client’s business, types of transactions, and effectiveness of accountants NOTE REVENUE ACCOUNTING CAN HAVE HIGH INHERENT RISK because of the complexity of revenue accounting and management bias/optimism CONTROL RISK Control risk is the probability that the auditee’s INTERNAL CONTROL POLICIES AND PROCEDURES WILL FAIL TO DETECT OR PREVENT MATERIAL MISSTATEMENTS Like inherent risk auditors do not create or affect the control risk, they can only evaluate an organization’s control system and assess the probability of material misstatements assessment is based on evaluation of the control system OR internal control relevant to the audit I.E: Policies and procedures that affect control risk relating to specific financial statement assertions at the account balance or class of transactions level Internal Control Framework – read text book Preliminary control effectiveness conclusions and risk assessments are made for planning purposes
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2 Auditors often carry preconceived notions about control risk when they audit the same organization year after year Control Risk Assessment Control risk assessment provides only an INDIRECT ASSESSMENT of the monetary amount of misstatement of financial statements
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CACC521 CH07 part 1 - 1 OBJECTIVE 1: DESCRIBE the...

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