Auditor's Materiality and Risk Assessment

Performance materiality

The materiality level that an auditor uses for determining significant accounts, significant locations, and audit procedures for those accounts and locations.

Risk of material misstatement

A risk that exists at the overall financial statement level and at the assertion level, involving inherent risk and control risk.

Inherent risk

Represents an identified and assessed risk of material misstatement that requires special audit consideration.

Acceptable audit risk

The impact on the amount of acceptable audit risk if an auditor believes the chance of financial failure of a client is high.

Inherent risk assessment

The factor that should lead an auditor to assess inherent risk as high.

Client business risk assessment

The factor that would lead an auditor to assess client business risk at a higher level.

Overall materiality

The materiality level set by an auditor that would be material to the income statement and the balance sheet.

Performance materiality assessment

The amount an auditor typically assesses performance materiality to be for a client.

Posting materiality

The percentage at which auditors commonly set posting materiality.

Quantitative evaluation

Determining whether the upper limit of the possible deviation rate exceeds the tolerable deviation rate.

Audit objective adjustment

When an auditor would change an audit objective to estimating the correct value.

Tainting percentage

The percentage of misstatement present in a logical unit.

Risk of overreliance

A 5% risk of overreliance reflected in a statement.

Sampling objective

The objective of sampling when testing controls.

Monetary unit sampling objective

The primary objective of monetary unit sampling.

Representative samples selection

How an auditor can increase the chances that systematically selected samples are representative of the population.

Sampling method

The sampling method that allows an auditor to measure the risk of making an incorrect inference about the population from which the sample is taken.

Illegal Act

Acts of omission or commission by an entity, intentional or unintentional, contrary to laws or regulations

Projected Misstatements

Misstatement type based on auditor's estimate of total misstatements in a population from audit sample

Loss Contingency Disclosure

Required by GAAP when contingent loss is probable or exposure exceeds accrued amount

Subsequent Event Treatment

Disclose and adjust in year-end financial statements for major business decisions after balance sheet date

Policies for Loss Contingencies

Responsibility of management to design policies in line with GAAP

Analytical Procedures

Procedures aiding auditor in forming conclusions on financial statement consistency

Engagement Quality Review

Risk-based review evaluating significant judgments and conclusions by audit team

Noncompliance

Acts contrary to laws or regulations, intentional or unintentional

Client's vs Auditor's Estimate

Auditor should gather evidence to resolve differences and use the more appropriate estimate

Type I vs Type II Subsequent Events

Type I events require financial statement adjustment, while Type II events need footnote disclosures

Support Letter

Written evidence of management's financial support in a going concern evaluation

Illegal Act Disclosure

If material and undisclosed, auditor should issue an adverse opinion

Adverse Opinion on Internal Controls

Issued when there is one material weakness in internal controls over financial reporting

Scope Limitation Cause

Scenario like destruction of accounting records leading to a scope limitation

Unqualified Report Condition

Requires adequate financial statement disclosures for issuing an unqualified report

Scope limitation that is material but not pervasive

Qualified

Basic principle of audit reporting according to the AICPA

The purpose of an audit is to enhance the degree of confidence that users can place in the financial statements.

Audit report paragraph for disclosing all substantive reasons for issuing a qualified report

Scope paragraph

Auditor's opinion for a going concern issue

Unqualified with emphasis-of-matter paragraph

Agency that will only accept an unqualified opinion

Public Company Accounting Oversight Board (PCAOB)

Departure from financial reporting framework that is material and pervasive

Adverse

Difference between auditor's report on nonpublic and public companies

The auditor's report for nonpublic companies includes a paragraph referencing the audit of internal controls.

Primary concern about the shipping policy of a supply company

The amount of the client's inventory stored at the retailer's location

Management assertion for reviewing disbursement records for related liability

Completeness

Insignificant account to the acquisition and payment cycle but of interest to an auditor

Income tax expense

Fraud trend relating to the overstatement of inventory

Ending inventory increasing faster than sales trends

Objective addressed by using prenumbered receiving reports

Recorded accounts payable are for approved purchases.

Procedure for high fraud risk in accounts payable

Send blank confirmations to vendors

Internal control weakness allowing manipulation of goods receipt

Receiving documents are manually numbered by employees.

Internal control to mitigate risk of kickback arrangements with vendors

Require purchasing agents to conduct sealed competitive bids for large purchases

Document to review for authorized purchase of goods or services

Requisition

Activity in the acquisition and payment cycle

Create requisition for goods

Management assertion addressed when determining if inventory balances include all transactions

Completeness