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Chapter 8 objectives
Consider how materiality is used to decide on the amount of fieldwork to be collected List the different types of risks considered during the audit process Identify the components of the audit risk model Explain how inherent risk is assessed Discuss how the audit risk model is used during the conduct of the audit
8-2
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8-3
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8-4
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8-5
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8-6
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8-8
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8-10
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What is risk?
Risks arise when a situation involves uncertainty Assessing risks includes assessing probabilities what is the risk of rain today? What is the risk of a flood today? Assessing risks is part of our daily lives we constantly assess the likelihood of events when making decisions
8-11
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Risk in auditing
The auditor accepts some level of uncertainty when performing an audit There is always a small likelihood remaining that the financial statements may be in error The audit risk model is used as part of a strategic auditing approach
8-12
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Strategic auditing
An audit engagement is a tactical plan of action Audit procedures are designed to satisfy audit objectives and to reduce the probability of errors or other misstatements in the financial statements
8-13
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8-14
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Audit risk
A measure of the auditors willingness (i.e. the auditor chooses this number) to accept that the financial statements may be materially misstated even though a proper audit has been conducted Audit ASSURANCE is the complement of audit risk Complete assurance is impossible to achieve
8-16
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Inherent risk
A measure of the likelihood that there are material misstatements in a segment simply due to the nature of the segment (e.g. cash is more likely to be stolen than sheets of steel) Internal controls are ignored in this assessment
8-19
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Control risk
A measure of the likelihood that misstatements will NOT be detected or prevented by the internal control systems This assessment is conducted because it is required by generally accepted auditing standards and also because it is needed to design the nature and extent of audit tests
8-21
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Control risk
What would we consider when assessing the control risk with respect to money deposited at an ATM?
8-23
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Detection risk
This is the only part of the audit risk model that can be affected by the actions of the auditor
8-27
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8-28
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8-29
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8-30
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