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Chap 6 - Risk Assessment (Audit risks & Responses (Audit risks…
Chap 6 - Risk Assessment
Audit risks & Responses
Audit risks
Inherent risk
nature of the entity
Control risk
internal control system
Detection risk
reduce AR to an acceptably low level
auditor not detect material misstatement
Component
Sampling risk
Non-sampling risk
effectiveness of audit procedure
Responses
Test of control
inquiry
reperformance
inspection
Substantive procedures
must always be carried out on material items
degree based on effectiveness of internal control system
components
test of details
for account balances
appropriate for matters identified as significant risks
Substantive analytical procedures
for large volumes of predictable transactions
Concepts of materiality & performance materiality
the higher the audit risk, the lower the value of materiality
Performance materiality
particular classes of transactions, balances & disclosures
less than materiality level
so that aggregate of uncorrected & undetected misstatements not exceeds materiality as a whole
Analytical procedures
Fraud & Misstatement
Fraud
Fraudulent financial reporting
manupulating accounting records
misrepresentation/omission of events/transactions
misapplication of ac/t principles
involves management override of controls that otherwise may
appear to be operating effectively.
Misappropriation of assets
theft of assets
usually involve management
Responsibilities of auditors
obtain reasonable assurance that FS are free from MM, whether caused by fraud or eror
consider the possibility of management overriding controls
consider the legal and regulatory framework
obtain a general understanding of legal and general framework, how entity complies
remain alert to possibility that audit procedures may highlight instances of non-compliance
non-compliance: discuss with TCWG/audit committee
recognizing the fact that audit procedures that are effective for detecting error may not be effective in detecting fraud
Communications to Management and with Those Charged with Governance
Consider the responsibility of reporting to regulatory and enforcement authorities.
Understanding the entity & its business environment