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AUDIT RISK AND MATERIALITY - Coggle Diagram
AUDIT RISK AND MATERIALITY
Terms of Inherent Risk
Transaction level
relate to test of transactions
to determine transactions that have been processed to appropriately ledger, complete and classified properly
Account balance level
relate to testing for the item or balance actually exist, own by entity and proper valuation in the account
Inherent limitation of internal control systems
human error due to carelessness, ignorance and rejection
internal control bypassed through collusion of management or employee
internal control is for routine transactions and unable to process properly address non-routine transactions
internal control become not relevant due to changes in condition and environment
cost benefit analysis
Level of control risk
General Level
consider attitude of management towards important control system
specific level
consider and evaluate whether existing control procedures is good enough to prevent and detect error or not
What auditor should consider
nature of the substantive procedures
timing of the substantive procedures
appropriate planning, direction and supervision during the audit work
extent of substantive procedures
Detection risk
audit procedures to carry out are substantive test and analytical review procedures
auditor is responsible to design audit procedures that will provide reasonable assurance that any material misstatement will be detected and removed from FS
if inherent risk and control risk are high, the level of detection risk is low
Relationship of audit risk and audit evidence
true to detection risk for a particular assertion, the lower the detection risk determined by auditor, the greater amount of evidence needed
inherent risk and control risk have direct relationship to audit evidence. The lower the inherent risk and control risk, the lesser amount of evidence needed
inverse relationship between audit risk and amount evidence needed to support auditor's opinion. The lower the level of audit risk to be achieved, the greater amount of evidence is needed