Professional Documents
Culture Documents
Chapter 03 PP T International
Chapter 03 PP T International
Chapter Three
Risk Assessment and
Materiality
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Audit Risk
Individual account
Financial statement
balance or class
level
of transactions level
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An auditor’s exposure
to financial loss and
damage to
professional reputation.
Negative
publicity
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Audit Risk = IR × CR × DR
Detection risk:
Risk that auditor will not detect misstatements
AR = IR × CR × DR
AR
DR = IR × CR
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Case AR IR CR DR
1 Very low High High Low
2 Low Low High Moderate
3 Moderate High Low Moderate
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Auditors need to
identify business risks and
understand the potential
misstatements that Business risks
may result. include any external or
internal factors, pressures, and
forces that bear on the entity’s
ability to survive and
be profitable.
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Industry Regulatory
Factors Environment
Objectives and
Strategies
Internal Business
Control Risks
Nature of
the Entity
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Inquiries of
Management
and Others
Analytical Observation
Procedures and Inspection
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Fraud involves
intentional misstatements.
Fraudulent Misappropriation
financial reporting of assets
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Stealing
assets Paying for
goods and services
not received
Embezzling
cash received
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Nature
of the Complex
industry or unstable
organizational
structure
Ineffective
monitoring of
management
Deficient
internal
control
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Use of
inappropriate accounting Poor communication
based on materiality channels for reporting
inappropriate behaviour
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Discussion Inquiries of
among the management
audit team and others
Sources of
information
Fraud Analytical
risk factors procedures
Other relevant
information
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Auditor’s Response to
the Risk Assessment
Assess the risk of material misstatement.
Documentation of the
Auditor’s Risk Assessment
The auditor should document:
Discussions among engagement personnel.
Procedures performed to identify and assess the risks
of material misstatement due to fraud.
Risks of identified material misstatement due to fraud
and a description of the auditor’s response to the risks.
Fraud risks or other conditions that result in additional
audit procedures.
The nature of the communications about fraud made to
management, those charged with governance, and
others.
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Materiality
Omissions or misstatements of items are material if
they could, individually or collectively, influence the
economic decisions of users taken on the basis of the
financial statements. Materiality depends on the size
and nature of the omission or misstatement judged in
the surrounding circumstances. The size or nature of
the item, or a combination of both, could be the
determining factor.
Materiality is
a matter of professional
judgment.
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Materiality
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End of Chapter 3
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