Audit Risk and Related Concepts

These flashcards cover key vocabulary terms and definitions related to audit risk and risk assessment in audits.

Audit Risk

The risk that an auditor expresses an inappropriate opinion on materially misstated financial statements.

Risk of Material Misstatement (RMM)

The risk that the financial statements are materially misstated prior to the audit, combining inherent risk and control risk.

Inherent Risk

The susceptibility of an assertion to material misstatement that could occur before considering internal controls.

Control Risk

The risk that a material misstatement will not be prevented or detected by the client's internal controls.

Detection Risk

The risk that audit procedures will fail to detect misstatements exceeding performance materiality.

Acceptable Audit Risk (AAR)

A measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit.

Audit Risk Model (ARM)

A framework used to decide how much and what types of evidence to accumulate for each relevant audit objective, expressed as PDR = AAR / (IR x CR).

Planned Detection Risk (PDR)

The risk that audit evidence for an audit objective will fail to detect misstatements exceeding performance materiality.

Fraud Risk

The risk that financial statements are materially misstated due to fraud or error.

Engagement Risk

The risk that the auditor will suffer harm after the audit is finished, even though the audit report was correct.

What factors affect audit risk?

Nature of the client, complexity of transactions, and the environment in which the client operates.

How can auditors mitigate audit risk?

By conducting thorough risk assessments, implementing effective internal controls, and using substantive testing procedures.

What is the relationship between audit risk and substantive procedures?

As audit risk increases, the auditor is likely to perform more extensive substantive procedures to reduce detection risk.

How does timing affect audit risk?

Timing can affect audit risk as certain transactions may be more susceptible to misstatement during specific periods, impacting the auditor’s assessment and procedures.

What role does auditor judgement play in assessing audit risk?

Auditor judgment is crucial in assessing audit risk as it influences the identification of risk areas, evaluation of internal controls, and determination of the appropriate responses to risks identified.

What is fraud risk assessment in relation to audit risk?

Fraud risk assessment involves identifying and evaluating the risks of fraud that may result in material misstatement, which is a critical part of the audit risk assessment process.