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Chapter 9

Chapter 9. Materiality and Audit Risk. Kevin K. Under what conditions are we required to obtain an understanding of the internal controls?. Aida. What is the second standard of field work?. Tavian.

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Chapter 9

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  1. Chapter 9 Materiality and Audit Risk

  2. Kevin K Under what conditions are we required to obtain an understanding of the internal controls?

  3. Aida What is the second standard of field work?

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

  5. planning phase we are always required to obtain an understanding of the Internal Control The auditor must obtain a sufficient understanding of the entity, its environment, including its internal control, to assess the risk of materialmisstatement and to design the nature, timing, and extent of the audit procedures

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

  7. David Under what conditions are we required to obtain sufficient appropriate audit evidence?

  8. Erin How do we obtain audit evidence?

  9. What is the definition of Audit Risk

  10. Page 113

  11. Nicholas M What is the definition of Materiality?

  12. Megan What is the definition of Tolerable Misstatement?

  13. Belen Describe a Significant Class of Transactions ? Describe a Transaction Cycle?

  14. 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

  15. Audit Risk Model • Page 221

  16. Josh What are the elements of the “Audit Risk Model”?

  17. Materiality and Risk the Audit Risk Model AAR = IR * CR * PDR page 221

  18. Audit Risk Model

  19. Page 221 Materiality and Risk the Audit Risk Model AAR = IR * CR * PDR Risk of Material Misstatement RoMM = combines IR * CR

  20. Danielle 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?

  21. environmental client auditor

  22. Obtain engagement 1) Analytical procedures 1st Std of FW Understand the client 2nd Std of FW Understand the internal controls Risk assessment 2) Tests of controls (transactions) 3rd Std of FW 3) Substantive tests of transactions 4) Substantive Analytical procedures 5) Substantive tests of details of balances Reporting reportingStds

  23. Audit Risk Model

  24. Melissa O Describe the relationship between Control Risk and the planned level of Detection Risk? The mathematical relationship

  25. Audit Risk Model

  26. Audit Risk Model

  27. Audit Risk Model

  28. Erynn What is the definition of Control Risk

  29. Fabiola What is the definition of Planned Detection Risk

  30. Andrew K 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 …. ?

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

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

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

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

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

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

  37. High Risk Areas and Transactions

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

  39. 1. Related Party Transactions high risk

  40. Related Party Transactions high risk - page 180 & 228 One of the parties is in a position to exert significant influence over another party Related parties can structure transactions to conceal problems in the financial statements

  41. Katie Please describe Professional Skepticism ?

  42. Professional Skepticism .07 Due professional care requires the auditor to exercise professional skepticism. Professional skepticism is an attitude that includes a questioning mind and a critical assessment of audit evidence. ..... .09 The auditor neither assumes that management is dishonest nor assumes unquestioned honesty. In exercising professional skepticism, the auditor should not be satisfied with less than persuasive evidence because of a belief that management is honest. See page 143

  43. 2. Non Routine Transactions high risk

  44. 3. Judgement -Actg Estimates

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