audit risk an audit evidenceaudit risk and audit evidenceaudit risk and audit evidenceaudit risk and audit evidence.ppt

Chapter 5: Audit risk and audit evidence  Learning Objectives Explain the importance of the concept of audit risk its three components Describe the relationship between audit risk and audit evidence Define the concept of materiality used in auditing State how the auditor arrives at judgements about materiality at the financial statement level and in relation to individual account balances Describe the relationship between materiality and audit evidence Learning Objectives State the categories of management’s financial statement assertions Derive specific audit objectives from the categories of assertions Indicate the factors that affect the sufficiency and appropriateness of audit evidence Identify the types of corroborating information Describe the three classifications of auditing procedure and their purpose Audit Risk Components Audit risk The auditor may express an inappropriate audit opinion Inherent risk A material misstatement will occur in the absence of controls Control risk Material misstatements will not be prevented or detected by controls Detection risk Material misstatements will not be detected by the auditor Relationship among audit risk components Quantified audit risk model Risk components matrix for Detection Risk Materiality The concept of materiality Effect on judgements and decisions of users The auditor considers materiality when: Determining the nature, timing extent of audit procedures Evaluating the effect of misstatements on the fair presentation of financial statements Materiality What is materiality? ￡10,000 understated fixed assets. Is this material? Materiality Financial statement materiality Fairness of financial statements taken as a whole Quantitative guidelines Qualitative considerations eg MD takes ￡5 from petty cash without signing Materiality - Quantitative guidelines Threshold An amount equal to or greater than 10% of operating profit is regarded as material An amount equal to or less than 5% of operating profit