What are the 4 information risks?
- competing Incentives
- management may be inclined to present financial statement information to further their own objectives - remoteness
- financial statement users cannot access the information of the entity being reviewed - reliability
- financial statement users are concerned about the accuracy of the information presented - complexity
- management may be inclined to present financial statement information to further their own objectives
What is an audit?
an independent examination of a company’s financial statements to assess the reliability of the information presented
auditors will look for mistakes and tell you to fix them before giving their final opinion
What are the 3 levels of assurance?
Reasonable assurance (audit engagement)
positive expression of opinion
(“in our opinion the statement presents fairly”)
limited Assurance (review engagement)
negative expression of opinion
(“nothing has come to our attention” )
no assurance (compilation engagement / notice to reader)
no expression of opinion
What are the 4 different audit report opinions?
- fairly stated… - - unmodified (“clean”) opinion
- fairly stated, expect for - - - qualified opinion
- unable to conclude… disclaimer of opinion
- does not fairly state… adverse opinion
What are the quantitative materiality factors?
- amount that impact decision of a user
- selected as a percentage of a base, examples include:
revenue, net income before tax,
total assets, expenses - typically normalized
What are the qualitative materiality factors?
- compliance with regulations
- compliance with covenants
- impact on ratio analysis
- masks changes in earnings/trends
- impact on management compensation
What is the formula for audit risk model?
audit risk (AR) * inherit risk (IR) * control risk (CR) * detection risk (DR)
What is audit risk?
the risk that an auditor expresses an inappropriate opinion when the financial statements are materially misstated
What is inherit risk?
the susceptibility of the financial statements to a material misstatement without considering internal controls
What is control risk?
the risk that a client’s system of internal controls will not prevent or detect a material misstatement
What is detection risk?
the risk that the auditors will not be effective detecting a material misstatement should there be one
What are the 3 phases of an audit?
- risk assessment phase
- gaining an understanding of the client, identifying risk factors, developing and audit strategy, and assessing materially - risk response phase
- detailed testing of controls & substantive testing of transactions and balances - reporting phase
- providing an opinion on the fair presentation of the financial statements based on the evidence gathered
