1. Assessing the Risk of Material Misstatement
Chapter 9
Assessing the Risk of Material Misstatement

3. Phil
Under which auditing approach(es) are auditors required to obtain an understanding of the internal controls?

4. Deidre
Which Auditing Standard requires auditors to obtain an understanding of the internal controls?

6. planning phase
we are always required to obtain an understanding of the Internal Control
to identify & assess the RoMM risks of material misstatement, whether due to fraud or error, at the financial statement and relevant assertion levels through understanding the entity and its environment, including the entity's internal control, thereby to provide a basis for designing and implementing responses to the assessed RoMM.

7. Monica
Under which audit approach(es) are auditors required to obtain sufficient appropriate audit evidence?

8. Bryn
Which Auditing Standard requires auditors to obtain sufficient appropriate evidence?

9. AU 500 Audit Evidence
.04 The objective of the auditor is to design and perform audit procedures that enable the auditor to obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the auditor's opinion.

10. PJ
How do we obtain audit evidence?

11. Dannia
What is the definition of audit risk?

12. Audit risk. The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated.

13. What is the definition of Materiality?
Sean
What is the definition of Materiality?

15. Performance Materiality
tolerable error
tolerable misstatement
The allocation of the preliminary judgment about materiality to segments (account balances or classes of transactions)

16. Collin Name 2 Significant Classes of Transactions ?
Describe a Transaction Cycle?

17. Class of Transactions
Accounts receivable xxx.xx
Sales xxx.xx
Revenue & Collection Cycle
Cash xxx.xx

18. Audit Risk Model

19. What are the elements of the “Audit Risk Model”?
Torri
What are the elements of the “Audit Risk Model”?

20. Risk of Material Misstatement
Materiality and Risk
Page 269 (237)
the Audit Risk Model
AAR = IR * CR * PDR
Risk of Material Misstatement
RoMM = combines IR * CR

21. Audit Risk Model

22. Paloma Which Component(s) of Audit Risk are auditors able to reduce?
Which Component(s) of Audit Risk are auditors unable to reduce?

23. environmental
client
auditor

24. Obtain engagement
Understand the client AU 315
Analytical procedures
Understand the internal controls
Risk assessment
Testing AU 500
Tests of controls (transactions)
Substantive tests of transactions
Substantive Analytical procedures
Substantive tests of details of balances
Reporting AU 700

25. The mathematical relationship
Aidan
Describe the relationship between Control Risk and the planned level of Detection Risk?
The mathematical relationship

26. Hanna
What type of audit procedures will we perform to obtain appropriate evidence that controls are effective?

27. Abby
What type of audit procedures will we perform to reduce Detection Risk to a low level?

29. What is the definition of Control Risk
Alice
What is the definition of Control Risk

30. Control risk. The risk that a misstatement that could occur in an assertion about a class of transaction, account balance, or disclosure and that could be material, either individually or when aggregated with other misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity's internal control.

31. Cory
What is the definition of
Planned Detection Risk

32. Planned Detection risk
Planned Detection risk. The risk that the audit evidence for a segment will fail to detect misstatements exceeding tolerable misstatement.

33. Detection risk. The risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and that could be material, either individually or when aggregated with other misstatements.

34. Patrick
If we assess CR = Low, what does that tell us about the level of PDR …. ?
If we assess CR = High, what does that tell us about the level of PDR …. ?

35. Devin
If we assess CR = Max, what does that imply about the effectiveness of the Internal Controls?

36. Sirinad
If we assess CR = Low, what does that imply about the effectiveness of the Internal Controls?

37. Max D
If we assess Control Risk as Low, our audit procedures would need to generate evidence that demonstrates ?????

38. Carolyn If PDR = High, what does that imply about Control Risk …. ?
If PDR = Low, what does that imply about Control Risk …. ?

39. preliminary Control Risk assessment significant classes of Transactions
occur
complete
accuracy
classify
cutoff
Credit sales
Low
Max
Cash receipts
Payroll
Cash Disburse
Purchasing

40. when we assess Control Risk less than Max
Credit Sales Transactions
Control
activity
Test of
Control Proc
Results
Of ToC
Occur Low
Complete Low
Accuracy Low
Classification Low
Cutoff Max
Max

41. High Risk Areas and Transactions

42. 1. Related Party Transactions
2. Non Routine Transactions
3. Judgement -Actg Estimates
4. Complex Transactions

43. 1. Related Party Transactions
high risk

44. Related Party Transactions
high risk - page 228 & 276 (196 & 244)
any party with which the audit client deals, where one of the parties can influence the management or operating policies of the other.
Related parties can structure transactions to conceal problems in the financial statements

45. 2. Non Routine Transactions
high risk

46. 3. Judgement -Actg Estimates

48. Auditing accounting estimates
high risk
p. 268 (245) (judgment required)
Keep track of differences

49. Auditing accounting estimates
With estimates, there often is no right answer
Keep track of differences between the estimate and what auditor finds reasonable
Evaluate differences taken together

51. 4. Complex Transactions
high risk
page 220 (188) - ENRON

52. Marisela
What is the definition of
Professional Skepticism ?

53. An attitude that includes a questioning mind, being alert to conditions that may indicate possible misstatement due to fraud or error, and a critical assessment of audit evidence.

54. Effectiveness of Internal Controls and Audit Approaches

56. for private companies non-SEC companies not covered by Sarbanes-Oxley

57. Adam
After evaluating the design of the controls you do not believe the client’s controls would prevent, or detect and correct misstatements even if properly implemented
You believe the controls are INeffective
How will you preliminarily assess CR ?

58. David
After evaluating the design of the controls you do not believe the client’s controls would prevent, or detect and correct misstatements even if properly implemented
You believe the controls are INeffective
You preliminarily assess CR = High
Which audit approach will you take?

59. Alyssa You believe it would cost less to perform
$ubstantive Test$ < Tests of Contols
which audit approach will you take ?

60. Karly Which types of audit tests will you perform Tests of Controls
evaluate design of controls
Tests of Controls
test operating effectiveness none some extensive
Substantive Tests
analytical procedures
test of details of account balances none limited extensive

61. Kelsey
After evaluating the design of the controls you do not believe the client’s controls would prevent, or detect and correct misstatements even if properly implemented
You believe the controls are INeffective
How will you preliminarily assess CR ?

62. Max M
After evaluating the design of the controls you do not believe the client’s controls would prevent, or detect and correct misstatements even if properly implemented
You believe the controls are INeffective
You preliminarily assess CR = High
Which audit approach will you take?

63. Lauren You believe it would cost less to perform
Tests of Contols < $ubstantive Test$
which audit approach will you take ?

64. Tessie Which types of audit tests will you perform Tests of Controls
evaluate design of controls
Tests of Controls
test operating effectiveness none some extensive
Substantive Tests
analytical procedures
test of details of account balances none limited extensive

65. Mason
After evaluating the design of the controls you believe the client’s controls would prevent, or detect and correct misstatements if properly implemented
You believe they would be Effective if implemented
How will you preliminarily assess CR ?

66. Lety
After evaluating the design of the controls you believe the client’s controls would prevent, or detect and correct misstatements if properly implemented
You believe they would be Effective if implemented
You preliminarily assess CR = Low
Which audit approach will you take?

67. Sallyanne You believe it would cost less to perform
Tests of Contols than $ubstantive Test$
which audit approach will you take ?

68. Neda Which types of audit tests will you perform Tests of Controls
evaluate design of controls
Tests of Controls
test operating effectiveness none some extensive
Substantive Tests
analytical procedures
test of details of account balances none limited extensive

69. After evaluating the design of the controls you believe the client’s controls would prevent, or detect and correct misstatements if properly implemented
You believe they would be Effective if implemented

70. Courtney You believe it would cost less to perform
$ubstantive Test$ than Tests of Contols
which audit approach will you take ?

71. Garland Which types of audit tests will you perform Tests of Controls
evaluate design of controls
Tests of Controls
test operating effectiveness none some extensive
Substantive Tests
analytical procedures
test of details of account balances none limited extensive

72. for private companies non-SEC companies not covered by Sarbanes-Oxley

73. Must do extensive Subst Tests
preliminarily
assess
Subst Tests
Less costly than
ToC
controls
effective
(CR =Low)
extensive
limit subst tests => analytical procedures
ineffective
(CR = MAX)
Must do extensive Subst Tests

74. Understand internal controls
Document understanding
Evaluate the design of the controls
Preliminarily assess control risk
Document prelim CR assessment
If CR < Low & $ToC < $Sub$t Tests
Design and perform ToC
Document results of ToC and CR assessment
Design and perform limited Subst Tests
Document results of Subst Tests
If CR = Max or $Sub$t < $ToC
Design and perform extensive Subst Tests

75. for public companies SEC companies covered by Sarbanes-Oxley

77. Dana
After evaluating the design of the controls you believe the client’s controls would prevent, or detect and correct misstatements if properly implemented
You believe they would be Effective if implemented
How will you preliminarily assess CR

78. Parker
After evaluating the design of the controls you believe the client’s controls would prevent, or detect and correct misstatements if properly implemented
You believe they would be Effective if implemented
You preliminarily assess CR = Low
Which audit approach will you take?

79. Cameron You believe it would cost less to perform
Tests of Contols than $ubstantive Test$
which audit approach will you take ?

80. Christopher Which types of procedures will you perform
evaluate design effectiveness
Tests of Controls
test operating effectiveness none some extensive
Substantive Tests
analytical procedures
test of details of account balances none limited extensive

81. Joey
After evaluating the design of the controls you do not believe the client’s controls would prevent, or detect and correct misstatements even if properly implemented
You believe the controls are INeffective
How will you preliminarily assess CR ?

82. Ben
After evaluating the design of the controls you do not believe the client’s controls would prevent, or detect and correct misstatements even if properly implemented
You believe the controls are INeffective
You preliminarily assess CR = High
Which audit approach will you take?

83. Jared You believe it would cost less to perform
$ubstantive Test$ < Tests of Contols
which audit approach will you take ?

84. Jillian Which types of audit tests will you perform Tests of Controls
evaluate design of controls
Tests of Controls
test operating effectiveness none some extensive
Substantive Tests
analytical procedures
test of details of account balances none limited extensive

85. analytical procedures
preliminarily
assess
Subst Tests
Less costly than
ToC
controls
effective
(CR < Low)
can limit subst tests
analytical procedures
ineffective
(CR = MAX)
must do some ToC
Extensive Subst Tests
Tests of Details

86. Understand internal control structure
Document understanding
Evaluate the Design Effectiveness of ICS
Design and perform ToC to assess CR
Document results of ToC
and CR assessment
If CR > Low
Design and perform extensive Subst Tests
Document results of Subst Tests

91. Evaluation of Sample Results
Critical Value = μ + Zβ* Sx/√n
2, *1, / √ 44 = 2,513.42
We are unable to conclude that Accounts Receivable is not materially overstated because the sample mean of $2, is less than the $2, critical value.