Modern Auditing:
Assurance Services and the Integrity
of Financial Reporting, 8
thEdition
William C. Boynton
California Polytechnic State University at San Luis Obispo
Raymond N. Johnson
Portland State University
Audit Risk
–
An Overview
•
Concept of Audit Risk
– Inverse of reasonable assurance
– If 99% certainty is desired, the audit risk is 1%
•
Professional Judgment and Audit Risk
– Usually audit firm policy
Fraud Defined
• Acts Resulting in Material Misstatements – Fraud or Error
– Intentional or Unintentional
• 2 Types of Misstatements Relevant to Fraud
– Fraudulent Financial Reporting
Fraudulent Financial Reporting
•
Incentives and Pressures
•
Opportunity
Misappropriation of Assets
•
Incentives and Pressures
•
Opportunity
Auditing for Fraud
•
Risk Assessment Procedures
•
Brainstorming Session
Risk Assessment Procedures
•
Inquiries of Management
•
Consider Unusual or Unexpected
Relationships
Brainstorming Session
• Allow junior members to benefit from senior members
• Allow more seasoned personnel a fresh set of eyes
• Allows audit management to set the appropriate tone for the audit
Specific Risks
•
Improper Revenue Recognition
Study Break
1. Audit risk is set according to:
A. AICPA guidelines
B. Audit firm policy
C. SEC regulations
D. GAAS
Study Break
2. Which of the following is not a
component of the fraud triangle?
A. Adequate training
B. Opportunity
C. Rationalization
D. Incentives
Study Break
3. All of the following are objectives of a brainstorming session except:
A. Allow management to set the tone B. Allow for junior members to benefit
from senior members
C. Allow for a fresh outlook on situation D. Allow for identification of actual
occurrences of fraud
Audit Risk Model
•
3 Components of Audit Risk
– Inherent Risk
– Control Risk
– Detection Risk
•
Illustrating the Model
– AR = IR x CR x DR
•
Expanded Audit Risk Model
Assessing the Components of
Audit Risk
•
Inherent Risk
•
Control Risk
Inherent Risk
•
Inherent Risk Defined
•
Assessing Inherent Risk
Control Risk
•
Control Risk Defined
•
Assessing Control Risk
– Planned assessed level of control risk
Detection Risk
•
Detection Risk Defined
•
Assessing Detection Risk
Interrelationships among Materiality, Detection Risk, and Substantive Audit
Components of Preliminary Audit
Strategies
•
Assessed level of inherent risk
•
Planned assessed level of control
risk
•
Planned assessed level of analytical
procedures risk
Three Basic Preliminary Audit
Strategies
•
Response to Lower Inherent Risks
•
A Lower Assessed Level of Control
Risk
Study Break
4. Which of the following is the
correct audit risk model?
A. AR = IR x CR x DR
B. IR = AR x CR x DR
C. CR = IR x AR x DR
D. DR = CR x IR x AR
Study Break
5. ______ is the risk that a material
misstatement could occur and will not be prevented or detected by the
entity’s internal controls.
A. Inherent Risk B. Audit Risk
C. Control Risk D. Detection Risk
Study Break
6. The components of preliminary audit strategies include all of the following except:
A. Assessed level of inherent risk
B. Planned assessed level of control risk C. Actual assessed level of control risk D. Planned assessed level of analytical
procedures risk
