[AUD] Audit Risk, Sampling Risk, Materiality

1. Audit risk

auditor may unknowingly fail to modify the opinion that is MM
- Planned level of audit risk
    the degree to which external users rely on the FS
    likelihood that a client will have financial difficulties after an audit
-  Achieved level of audit risk
   depends on the amount of audit evidence gathered
   planned > achieved

1) Inherent risk (IR)
result from error, fraud (incentive, pressure, opportunity), illegal acts
factor: the complexity of the transaction, ease of theft, estimation, volume, amount of balance, industry circumstance
assess: Understand entity, environment, Analytical procedure

ex) Loss, unusual transaction, complex accounting, initial public offering

2) Control Risk(CR)
MM will not prevented/detected on a timely basis by IC

factor: Effectiveness of IC, Mgt oversight
assess: Understanding IC, Test of control

ex) High turnover rate of mgt, aggressive reporting, internal auditor report to mgt, mgt BOD dominated by one

 

* IR, CR = risk of material misstatement, exists independently of the FS audit

3) Detection risk(DR)
the auditor may not detect MM
제대로 ST 하지 않아서 주요MM 놓침
factor: Nature, Timing, Extent
assess: not to be assessed but calculated

 

ex) first-year audit client

 

 

2. Fraud Risk

factor

- inventive / pressure: reason to commit fraud, pressure from in/out 

- opportunity: ineffective IC, override of controls, allows a misrepresentation to occur

- attitude/ rationalization: mgt disregards controls, mgt's overly aggressive attitude in meeting financial goals

 

fraudulent financial reporting

entity unable to generate cash flows from operations + report substantial growth > inconsistent

overly complex organizational structure involving unusual lines of authority

supporting accounting records and files are not produced promptly when requested

lost the document of the new asset

mgt's bonus is based on profit

EE not taking vacation

 

Management override of controls

JE made by an individual who does not typically  make JE

JE is recorded as a post-closing entry that has no explanation or description

JE made to a seldom-used account

 

 

3. Sampling Risk

 

the risk that the sample might not project the entire population
- Test of controls
  1) The risk of underreliance: sample, not effective > entire p, effective
  2) The risk of overreliance: sample, effective > entire p, not effective

- Substantive Test
  1) The risk of incorrect rejection: sample, not effective > entire p, effective
  2) The risk of incorrect acceptance: sample, effective > entire p, not effective

 

4. Materiality

information that is likely to be viewed by reasonable investor as altering the mix of available info
developing an audit strategy to determine the level of following materiality
- Preliminary Materiality, FS materiality, overall materiality
  Planning, overall audit strategy
  determine the nature, timing, and extent of substantive tests.

- Tolerable misstatement
   Sampling
   preliminary materiality apportioned to accounts

- Performance Materiality
  Evaluate audit results
  M > Total likely misstatement( factual misstatement + likely misstatement) : UM
  Less than preliminary materiality
 

1) Determine Materiality
 Quantitative:
   percentage of chosen benchmarks ( PY, operating income before taxes, total assets, net sales )
 Qualitative
   factor: need of users, effects of classification, cost of correction
    misstatement
    difference bet control account & sub recorded not investigated
    changes loss > profit
    relative party transaction not disclosed

    illegal payment

2) Materiality Found
consider particular circumstance
consider the impact of PY uncorrected M on CY/ CY uncorrected M on PY
consider Size, nature of M
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considered in the evaluation of audit findings on the CY, document in a summary of uncorrected misstatement