The risk of material misstatement is composed of the three components of audit risk
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CH 5AssertionStatementa.CompletenessAll assets have been recorded.b.CutoffTransactions are recorded in the correct accountingperiod.c.Existence and occurrenceThere is such an asset.d.Presentation anddisclosureAssets are properly classified.e.Rights and obligationsThe company legally owns the assets.f.ValuationAssets are recorded at proper amounts.Auditors perform audit procedures to obtain audit evidence that will allow them todraw reasonable conclusions as to whether the client’s financial statements followgenerally accepted accounting principles. Match each audit procedure by selectingthe most appropriate type of audit procedure. Each type of audit procedure is used;one is used twice.Audit ProceduresType of Audit Procedureg.Prepare a flowchart of internal control over salesRisk assessment procedures (other than analyticalprocedures).h.Calculate the ratio of bad debt expense to creditsalesAnalytical procedures.i.Determine whether disbursements are properlyapprovedTests of controls.j.Confirm accounts receivableTest of details of account balances, transactions, ordisclosures.k.Compare current financial information withcomparable prior periodsAnalytical procedures.a.The risk of material misstatement is composed of the threecomponents of audit risk.Incorrectb.Inherent risk is the possibility of material misstatement beforeconsidering the client’s internal control.Correctc.Less control risk means an increase in the risk of materialmisstatement.Incorrectd.Detection risk does not exist when no audit is performed.Correcte.Rather than restrict detection risk through the performance ofmore substantive procedures, auditors assess it.Incorrectf.Absent any other changes, an increase in the risk of materialmisstatement results in an increase in audit risk.Correctg.Audit risk refers to the possibility that the auditors mayunknowingly fail to appropriately modify their opinion on financialstatements that are materially or immaterially misstated.Incorrecth.Both inherent risk and control risk exist independently of the auditof financial statements.Correcta. The risk of material misstatements is composed of inherent risk and control risk.c. A decrease in control risk, absent other changes, results in a decrease in the risk of material misstatement.d. Detection risk is a function of the audit and its procedures. If there is no audit there is no measure ofdetection risk.e. This is backwards. Auditors restrict detection risk through the performance of more substantive procedures. Show
Effective Date of Standard: For audits of fiscal years beginning on or after Dec. 15, 2010 .01 This standard discusses the auditor's consideration of audit risk in an audit of financial statements as part of an integrated audit1 or an audit of financial statements only. Objective.02 The objective of the auditor is to conduct the audit of financial statements in a manner that reduces audit risk to an appropriately low level. Audit Risk.03 To form an appropriate basis for expressing an opinion on the financial statements, the auditor must plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement2 due to error or fraud. Reasonable assurance3 is obtained by reducing audit risk to an appropriately low level through applying due professional care, including obtaining sufficient appropriate audit evidence. .04 In an audit of financial statements, audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial statements are materially misstated, i.e., the financial statements are not presented fairly in conformity with the applicable financial reporting framework. Audit risk is a function of the risk of material misstatement and detection risk. Note: The auditor should look to the requirements of the Securities and Exchange Commission for the company under audit with respect to the accounting principles applicable to that company. Risk of Material Misstatement.05 The risk of material misstatement refers to the risk that the financial statements are materially misstated. AS 2110, Identifying and Assessing Risks of Material Misstatement, indicates that the auditor should assess the risks of material misstatement at two levels: (1) at the financial statement level and (2) at the assertion4 level.5 .06 Risks of material misstatement at the financial statement level relate pervasively to the financial statements as a whole and potentially affect many assertions. Risks of material misstatement at the financial statement level may be especially relevant to the auditor's consideration of the risk of material misstatement due to fraud. For example, an ineffective control environment, a lack of sufficient capital to continue operations, and declining conditions affecting the company's industry might create pressures or opportunities for management to manipulate the financial statements, leading to higher risk of material misstatement. .07 Risk of material misstatement at the assertion level consists of the following components:
.08 Inherent risk and control risk are related to the company, its environment, and its internal control, and the auditor assesses those risks based on evidence he or she obtains. The auditor assesses inherent risk using information obtained from performing risk assessment procedures and considering the characteristics of the accounts and disclosures in the financial statements.6 The auditor assesses control risk using evidence obtained from tests of controls (if the auditor plans to rely on those controls to assess control risk at less than maximum) and from other sources.7 Detection Risk.09 In an audit of financial statements,detection risk is the risk that the procedures performed by the auditor will not detect a misstatement that exists and that could be material, individually or in combination with other misstatements. Detection risk is affected by (1) the effectiveness of the substantive procedures and (2) their application by the auditor, i.e., whether the procedures were performed with due professional care. .10 The auditor uses the assessed risk of material misstatement to determine the appropriate level of detection risk for a financial statement assertion. The higher the risk of material misstatement, the lower the level of detection risk needs to be in order to reduce audit risk to an appropriately low level. .11 The auditor reduces the level of detection risk through the nature, timing, and extent of the substantive procedures performed. As the appropriate level of detection risk decreases, the evidence from substantive procedures that the auditor should obtain increases.8 What are the 3 components of audit risk?Conversely, detection risk is typically managed by the audit team. The auditor's role is to attest to your company's financial statements.. Control risk. ... . Inherent risk. ... . Detection risk.. What are the components of the risk of misstatement?Risk of material misstatement is defined as 'the risk that the financial statements are materially misstated prior to audit. This consists of two components... inherent risk ... control risk.
Am I right that the risk of material misstatement is composed of the three components of audit risk?The risk of material misstatement is composed of the three components of audit risk. Incorrect. The risk of material misstatements composed of inherent risk and detection risk.
What are the major components of risk considered by auditors?The two components of audit risk are risk of material misstatement and detection risk.
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