Why is it important for the auditor to consider the risk of material misstatement at the overall financial statement level?


Chapter 8 introduced the eight parts of the planning phase of an audit. Which parts involve the evaluation of risk?

Why is it important for the auditor to consider the risk of material misstatement at the overall financial statement level?

Provide two examples of factors that might increase the risk of material misstatement at the overall financial statement level.

Assume that you are concerned that your client has recorded revenues that did not occur. What audit objective would you assess as having a high risk of material misstatement?

Describe the types of procedures auditors perform as part of their risk assessment procedures.

In addition to inquiring of individuals among management who are involved in financial reporting positions, such as the CFO and controller, which additional individuals should you consider making inquiries of as part of your risk assessment procedures? Be sure to describe how those individuals might be helpful to you in assessing risks of material misstatement.

Auditing standards require that the engagement team members engage in discussion about the risk of material misstatement. Describe the nature of this required discussion and who should be involved.

Auditing standards require that the engagement team members engage in discussion about the susceptibility of the financial statements to the risk of fraud.
How does this discussion relate to the required discussion about the risk of material misstatement?

Why is it important to distinguish the auditor’s assessment of the risk of material misstatement due to fraud from the assessment of the risk of material misstatement due to error?

How should the auditor consider risks related to revenue recognition when assessing the risk of material misstatement due to fraud?

What types of inquiries should the auditor make when considering the risk of material misstatement due to fraud?

What constitutes a significant risk?

Describe examples of characteristics of transactions and balances that might cause an auditor to determine that a risk of material misstatement is a significant risk.

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Describe which two factors of the audit risk model relate to the risk of material misstatement at the assertion level.

Explain the causes of an increased or decreased planned detection risk.

Define what is meant by inherent risk. Identify four factors that are associated with higher inherent risk in audits.

Explain why inherent risk is set for audit objectives for segments
(classes of transactions, balances, and related disclosures) rather than for the overall audit.
What is the effect on the amount of evidence the auditor must accumulate when inherent risk is increased from medium to high for an audit objective?

Explain the effect of extensive misstatements found in the prior year’s audit on inherent risk, planned detection risk, and planned audit evidence.

Explain what is meant by the term acceptable audit risk. What is its relevance to evidence accumulation?

Explain the relationship between acceptable audit risk and the legal liability of auditors.

Explain why there is an inverse relationship between planned detection risk and the amount of evidence an auditor collects for a specific audit objective.

Auditors have not been successful in measuring the components of the audit risk model. How is it possible to use the model in a meaningful way without a precise way of measuring the risk?

Explain the circumstances when the auditor should revise the components of the audit risk model and the effect of the revisions on planned detection risk and planned evidence.

Explain how audit risk and materiality are related and why they need to be considered together in planning an audit.

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