Acceptable audit risk is a measure of how willing the auditor is to accept that the financial statements may be materially misstated after the audit is completed and an unqualified opinion has been issued.
Inherent risk is a measure of the auditor’s assessment of the likelihood that there are material misstatements in an account balance before considering the
effectiveness of internal control.
The auditor decides whether to accept a new client or continue serving an existing one.
Identifying the reasons for the audit is likely to affect the remaining parts of the planning process.
The auditor also needs to obtain an understanding with the client about the terms of the engagement.
It is better to have no work than high risk, “bad work”.
Business and industry risk may even affect the auditor’s decision against accepting engagements in riskier industries such as financial services or health insurance.
Risks common to a particular industry may include inventory obsolescence, accounts receivable collection risk, reserve for losses in the casualty insurance industry.
Effective boards ensure the company takes only appropriate risks while the audit committee, through oversight of financial reporting, can reduce the likelihood of overly aggressive accounting.
To gain an understanding of the client's governance system, the auditor should understand how the board and audit committee exercise oversight along with the following:
The Sarbanes-Oxley Act requires that management certify it has designed disclosure controls and procedures to ensure that material information about business risks is made known to them
Analytical procedures are defined by auditing standards as evaluations of
financial information made by a study of plausible relationships among financial and nonfinancial data involving comparisons of recorded amounts to expectations developed by the auditor.
Required in the planning phase to assist in determining the nature extent and timing of audit procedures.
Analytical procedures are often done during the testing phase of the audit as a substantive test in support of account balances.
Activity ratios for accounts receivable and inventory are useful to auditors who often use trends in the accounts receivable turnover ratio to assess the
They involve the computation of ratios and other comparisons of recorded amounts to auditor expectations.
They are used in planning to understand the client’s business and industry.
They are used throughout the audit to identify possible misstatements, reduce detailed tests,
