Lesson 1 (Exam 1)

ARM Equation:

ARM Equation:

AR = IR *** CR * DR

What is AR?

The risk that the auditor’s opinion is wrong

What is IR?

The risk that the account is misstated by nature

What is CR?

The risk that misstatement could occur even with controls in place

What is DR?

The risk that misstatement will not be identified by audit procedures

RMM equation:

IR * CR

What does the Auditor assess?

IR and CR

What happens as RMM increases?

DR decreases

What happens as DR decreases?

Audit work increases

What are Management’s Assertions?

1. Existence/Occurrence

2. Completion/Cutoff

3. Valuation

4. Rights/Obligations

5. Presentation/Disclosure

What is a Review?

• A lower level of assurance than an audit

• Uses inquiry and analytics

• Negative or limited outcome

  • Higher detection risk

What is a Compilation?

• No assurance is given

• Helps the client put accounting into F/S format

• No testing done

• DR = 1.0

Unqualified Report Components:

• Standard Opinion Paragraph

• Basis of Opinion – Standard Responsibility Paragraph

• Basis of Opinion – Standard Scope Paragraph

• CAMs

Qualified Report w/ Auditing Defects & a Material Exception Components:

• Explanatory Paragraph

• Std. Responsibility Paragraph

• Modified Scope

• CAMs

Qualified Report w/ Accounting Defects & Material Exception Components:

• Explanatory Paragraph

• Std. Responsibility

• Std. Scope

• CAMs

Disclaimer of Opinion (Auditing Defects & Pervasively Material) Components:

• Explanatory Paragraph

• Modified Responsibility Paragraph

• No Scope Paragraph

• No CAMs

Adverse Opinion (Accounting Defects & Pervasively Material) Components:

• Explanatory Paragraph

• Standard Responsibility

• Standard Scope

• No CAMs

• Auditor Resigns

Disclaimer of Opinion (Unusual Circumstances & Pervasively Material) Components:

• Explanatory Paragraph

• Standard Responsibility

• No Scope

• No CAMs

Standard Report & Explanatory Paragraph (Material Exception) Components:

Adds Emphasis of a Matter

Material vs. Pervasively Material:

Pervasively Material occurs when there are multiple errors or scope limitations, the user cannot combine the financial statements and auditor’s opinion to reliably use the financial statements

Types of Accounting Defects:

1. GAAP

2. Fairness

3. Something in the Numbers

Result in Adverse Opinion

Types of Auditing Defects:

1. Audit Standards

Result in Disclaimer of Opinion