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  1. Audit Risk Model formula

    AR = RMM x DR = IR x CR x DR

  2. Audit Risk (AR) – The risk that …

    the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated

  3. Risks of Material Misstatements (RMM) – The risk that…, which consists of two components (IR and CR)

    the financial statements are materially misstated prior to audit

  4. Inherent risk -The chance of the FS contains errors due to…+3 examples

    • nature of the item the nature of client and the nature of the economy
    • Complexity of the item
    • Declining industry or poor economy
    • technology development

  5. Control Risk (CR) - the chance of …

    the company’s internal control system is not working

  6. Detection Risk (DR) – The risk that …

    the procedures performed by the auditor will not detect a misstatement that exists

  7. How to Apply the Audit Risk Model?

    • Step 1: Determine acceptable AR - Determined by engagement partner in Client Acceptance and Audit Planning
    • Step 2: Assess IR - Understand the client and its environment
    • Step 3: Assess CR - Understand the client’s internal controls
    • Step 4: Calculate planned DR - Low DR -> Easier to find the error -> more evidence needed

  8. Materiality= …

    tolerable misstatement

  9. Information is material if …

    omitting it or misstating it could influence decisions that users make on the basis of financial information

  10. Materiality can be assessed based on the …; Materiality is a ..concept.; High risk client means…; 2 steps to Calculating materiality; The auditor applies the concept of materiality …

    • Nature and magnitude;
    • Relative
    • low % and more evidence
    • Step 1: choose a benchmark ( or a base) Step 2: apply a certain % to the benchmark;
    • during various stages of the audit process

  11. the setting of preliminary judgment about materiality assists the auditor toAuditors consider materiality at the end of the audit becauseThe determination of materiality involves the exercise ofby auditors
    plan the appropriate amount of evidence to be accumulated; materiality affect auditor’s opinion.; professional judgment
  12. When performing audit tests, misstatements are identified from the sample and thenThe projected misstatement amounts for each account balance are and compared with the… The circumstances related to some misstatements may cause the auditor to
    make a projected misstatement of the entire population ; combined ; preliminary judgment about materiality set during the planning stage;

    evaluate them as material even if they are below materiality
  13. Relationship between Detection Risk and Materiality
    detection risk and materiality have a direct relationship

    Casual relationship: you calculate DR first, then you calculate the materiality.
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4510 - 6
2015-10-19 05:23:19

4510 - 6
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