Professional Documents
Culture Documents
Assurance
Services,
6e
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Chapter 4
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Managements
Risks
Business Riskfailure to meet objectives
Objectivesoverall plans
Strategiesmethods to meet objectives
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Auditors Risk
Responsibilities
Audit Riskauditor will give unqualified opinion on
misstated financial statements
Management Fraud Riskmanagement intentionally
misstates financial statements
Fraudulent financial reporting
Errors are unintentional misstatements or omissions of
amounts or disclosures in financial statements.
Auditors primary responsibility is to design procedures to
provide reasonable assurance that frauds that materially
misstate the financial statements are detected.
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Defalcation
Embezzlement
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Inherent Risk
Factors affecting account inherent risk include:
Dollar size of the account
Liquidity
Volume of transactions
Complexity of the transactions
New accounting pronouncements
Subjective estimates
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Control Risk
Control Risk (CR) is the likelihood that a material misstatement would not be
caught by the clients internal controls.
Factors affecting control risk include:
The environment in which the company operates (its control environment).
The existence (or lack thereof) and effectiveness of control activities.
Monitoring activities (audit committee, internal audit function, etc.).
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Detection Risk
Detection risk (DR) is the risk that a material
misstatement would not be caught by audit
procedures.
Factors affecting detection risk include:
Nature, timing, and extent of audit procedures
Sampling risk
Risk of choosing an unrepresentative sample.
Nonsampling risk
Risk that the auditor may reach inappropriate
conclusions based upon available evidence
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Nature
Timing
Lower
Detection
Risk
Higher
Detection
Risk
More
effective
tests.
Less
effective
tests.
Testing
Testing can
performed at
be
year-end.
performed at
Interim.
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Information Sources
General Business Sources
Company Sources
Minutes
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ESTIMATED
ACCOUNT
BALANCE
Attention directing
Identify potential problem areas
An organized approach
A standard starting place to start examining the financial statements
Describe the financial activities
Identify unusual changes in relationships in the data
Ask relevant questions
What could be wrong?
What legitimate reasons are there for these results?
Cash flow analysis
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Analytic Procedures:
Stages of Use
Preliminary planning-- required
Substantive testing -- optional
Final review -- required
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Inquiries
Management
Audit committee
Internal auditors
Others
Risk of Fraud
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Type of risk
Significance of risk
Likelihood of risk
Pervasiveness of risk
Assess controls and programs
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Unauthorized transactions.
Government investigations.
Regulatory reports of violations.
Payments to consultants, affiliates, or employees
for unspecified services.
Excessive sales commissions and agents fees.
Unusually large cash payments.
Unexplained payments to government officials.
Failure to file tax returns or to pay duties and fees.
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