What are the advantages of audit planning?
- Appropriate attention devoted to important areas of the audit
- Potential problem areas are identified & timeously resolved
- The audit is organised and managed effeciently & effectively
- Engagement team members with the appropriate expereince & expertise are allocated to the audit
- Work is properly delegated to assistants & reviewed
- The work performed by other auditors & experts are properly co-ordinated
What are the inherent limitations of audit planning?
- only cost effective controls can be implemented
- controls are designed to address routine transactions and not abnormal transactions
- controls can be circumvented by the collision of two or more people
- there are human errors
- inappropriate management override of controls
- procedures may become inadequate & compliance with the control procedures may deteriorate
What is risk of material misstatement?
Financial statements are materially misstated
What is an inherent risk?
Susceptibility of an assertion to a misstatement that could be material (individually or aggregated with other misstatements), assuming that there are no related internal controls
What is a control risk?
The risk that a misstatement could not be detected & corrected on a timely basis by the entity’s internal controls
What is a detection risk?
The risk that an auditor’s procedures will not detect a misstatement that exists in an assertion
Risk of Material Misstatement at Overall Financial Statement Level
Relates to financial statements as a whole & potentially affects multiple accounts
Risk of Material Misstatement at Overall Assertion Level
- Risks pertaining to specific classes of transactions, account balances & disclosures
- It will directly affect the nature, timing & extent of further audit procedures of individual accounts
Examples of RoMM @ Overall FS Level
- going concern problems
- management integrity
- legal liability
- nature of business
- control environment
- changes in management
Examples of RoMM @ Overall Assertion Level
- balances suspectible of misstatements
- degree of complexity of transactions
- degree of subjecivity in determining account balances
- suspectibility of assets for misappropriation
- abnormal transactions to not subject to routine processing
What is the relationship between materiality & audit risk?
- The higher the audit risk, the lower the materiality will be set
- The lower the audit risk, the higher the materiality may be set
