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AUDIT RISK AND MATERIALITY - Coggle Diagram
AUDIT RISK AND MATERIALITY
Definition Audit Risk
risk that the auditor gives an inappropriate opinion when financial statement are materially misstated
Auditor's response to risk assessment
determine audit procedures that necessary based on the risk assessment
if low risk need to design and perform normal procedures
if high risk need to design and perform extended procedures
evaluate whether sufficient audit evidence was obtained and if risk assessments were appropriate
assess risk of material misstatement
issue audit report
Acceptable Audit Risk (ARR)
measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified and unqualified opinion had been issued
Audit Risk Model
Inherent risk is risk of material misstatement occur ignoring internal control system
control risk is risk that internal control systems will not prevent or detect and correct the error of material misstatement
IR X CR X DR = Audit Risk
detection risk is risk that auditor's substantive testing will not detect misstatement
Factors that cause uncertainty
inherent limitation of the effectiveness of client's internal control systems
drawing of audit conclusion based on audit evidence that mostly persuasive than conclusive
nature of audit test
Inherent risk
relate to the characteristics of the business
inherent risk high if auditor conclude that there is a high likelihood of misstatement and ignore internal controls
internal controls is ignored in setting inherent risk as they considered separately in audit risk model as control risk
Level of inherent risk
at financial statement level or entity level
nature of the client's business, size and number of location of the company
the management have experience, integrity and attitude of directors and management
unusual pressure on management
factors affecting the industry such as economy, legislation, regulations and accounting practices
without previous assignment, inherent risk normally high in first engagement
at the account balance and transaction level
greater likelihood of misstatement exist in related party transactions as both parties are not independent parties
transactions that unusual to client are more likely to be incorrectly recorded due to lack of experience
misstatement found in previous audit have a high likelihood of occurring again this year due to some company is slow in making changes
many accounts required judgement
other factors to be considered as quality of accounting systems and susceptibility of assets to loss or misappropriation