Audit risk model, COSO, materiality, control testing and fraud risk considerations.
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- What are the three components of the audit risk model?
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Inherent risk, control risk, and detection risk.- What is inherent risk in the audit risk model?
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The susceptibility of an account or transaction to misstatement before considering the entity's controls.- What is control risk in the audit risk model?
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The risk that the entity's internal controls will not prevent or detect a misstatement.- What is detection risk in the audit risk model?
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The risk that the auditor's substantive procedures will fail to detect a misstatement that exists.- How does the audit risk model express the relationship between its three components?
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Audit risk equals inherent risk times control risk times detection risk.- What is planning materiality?
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The maximum amount by which the auditor estimates misstatements could exist without resulting in material misstatement of the financial statements.- What is performance materiality?
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The amount set by the auditor at less than materiality to reduce the probability that projected misstatements will exceed materiality.- What is the clearly trivial threshold in materiality?
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Misstatements below this amount are considered clearly inconsequential and do not need to be accumulated or considered.- What are common benchmarks used to establish planning materiality?
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Gross profit, revenue, net income before tax, total assets, and equity.- When setting materiality, what qualitative factors should an auditor consider?
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Compliance with loan covenants, regulatory requirements, earnings expectations, and other contractual obligations.- What is the first component of the COSO internal control framework?
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Control environment, which includes the tone set by leadership, integrity, ethics, competence, and accountability.- What is the second component of the COSO internal control framework?
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Risk assessment, which is the entity's process for identifying and analyzing relevant risks to achieving objectives.- What is the third component of the COSO internal control framework?
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Control activities, which are the policies and procedures that help ensure management directives are carried out.- What is the fourth component of the COSO internal control framework?
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Information and communication, which relates to identifying, capturing, and communicating relevant information to enable people to carry out their responsibilities.- What is the fifth component of the COSO internal control framework?
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Monitoring, which is the ongoing or periodic assessment of the effectiveness of internal control performance.
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