Chapter 9

1. Chapter 9 Materiality and Audit Risk

3. Katie B Under which audit approaches are we required to obtain an understanding of the internal controls?

4. Matthew Why are we always required to obtain an understanding of the internal controls regardless of the types of tests we will perform?

5. Ryan K What is the objective of AU-C section 315?

6. AU-C 315 Understanding the Entity & Its Environment & Assessing RoMM .03 The objective of the auditor is to identify and assess the 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 providing a basis for designing and implementing responses to the assessed risks of material misstatement.

7. 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.

8. Analytical Procedures during the planning phase • understand the client’s industry and business • to identify potential misstatements • attention directing • design audit procedures that reduce the risk we might fail to detect a material misstatement

9. December 2006 Statement on Auditing Standards 109 AICPA Understanding the Entity and its Environment and Assessing the Risks of Material Misstatement

10. Sabrina Under what conditions are we required to obtain sufficient appropriate audit evidence?

11. Lily What is the objective of AU-C section 500?

12. AU-C 500Audit 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.

13. Blair How do we obtain audit evidence?

14. Adam E What is the definition of audit risk?

15. Audit risk. The risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated. Audit risk is a function of the risks of material misstatement and detection risk.

16. Marilyn What is the definition of Materiality?

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

19. Cam Describe a Significant Class of Transactions ? Describe a Transaction Cycle?

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

22. Audit Risk Model • Page 128

23. Christy What are the elements of the “Audit Risk Model”?

24. Materiality and Risk the Audit Risk Model AAR = IR * CR * PDR page 128

25. Audit Risk Model

26. Page 128 Materiality and Risk the Audit Risk Model AAR = IR * CR * PDR Risk of Material Misstatement RoMM = combines IR * CR

27. Rachel Which Component(s) of Audit Risk do you think the auditor might be able to reduce? Which Component(s) of Audit Risk do you think the auditor would be unable to reduce?

28. environmental client auditor

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

30. Audit Risk Model

31. Lauren Describe the relationship between Control Risk and the planned level of Detection Risk? The mathematical relationship

33. Audit Risk Model

34. Audit Risk Model

35. Audit Risk Model

36. Greg What is the definition of Control Risk

37. 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.

38. Jill What is the definition of Planned Detection Risk

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

40. 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.

41. Riley 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 …. ?

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

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

44. Adam V If we assess Control Risk as Low, what will the evidence provided by our audit procedures need to demonstrate?

45. Rene If PDR = High, what does that tell us about Control Risk …. ? If PDR = Low, what does that tell us about Control Risk …. ?

46. preliminary Control Risk assessmentsignificant classes of Transactions preliminary Control Risk assessment

47. whenever we assess Control Risk less than Max Credit Sales Transactions

48. High Risk Areas and Transactions

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

50. 1. Related Party Transactions high risk