chapter 9 – audit risk, including the risk of fraud
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Audit Risk, Including the Risk of FraudTRANSCRIPT
Modern Auditing:Modern Auditing:Assurance Services and the Assurance Services and the
Integrity of Financial Reporting, 8Integrity of Financial Reporting, 8thth EditionEdition
Modern Auditing:Modern Auditing:Assurance Services and the Assurance Services and the
Integrity of Financial Reporting, 8Integrity of Financial Reporting, 8thth EditionEdition
William C. BoyntonWilliam C. BoyntonCalifornia Polytechnic State California Polytechnic State
University at San Luis ObispoUniversity at San Luis Obispo
Raymond N. Raymond N. JohnsonJohnson
Portland State UniversityPortland State University
Chapter 9 – Audit Risk, Including the Risk of Fraud
Chapter 9 OverviewChapter 9 OverviewChapter 9 OverviewChapter 9 Overview
Audit Risk – An OverviewAudit Risk – An OverviewAudit Risk – An OverviewAudit Risk – An Overview
• Concept of Audit Risk– Inverse of reasonable assurance– If 99% certainty is desired, the audit
risk is 1%
• Professional Judgment and Audit Risk– Usually audit firm policy– Comparable from one audit to
another
Fraud DefinedFraud DefinedFraud DefinedFraud Defined
• Acts Resulting in Material Misstatements– Fraud or Error
– Intentional or Unintentional
• 2 Types of Misstatements Relevant to Fraud– Fraudulent Financial Reporting
– Misappropriation of Assets
The Fraud TriangleThe Fraud TriangleThe Fraud TriangleThe Fraud Triangle
Fraudulent Financial ReportingFraudulent Financial ReportingFraudulent Financial ReportingFraudulent Financial Reporting
• Incentives and Pressures
• Opportunity
• Attitudes and Rationalization
Misappropriation of AssetsMisappropriation of AssetsMisappropriation of AssetsMisappropriation of Assets
• Incentives and Pressures
• Opportunity
• Rationalization
Auditing for FraudAuditing for FraudAuditing for FraudAuditing for Fraud
• Risk Assessment Procedures
• Brainstorming Session
• Specific Risks
Risk Assessment Risk Assessment ProceduresProcedures
Risk Assessment Risk Assessment ProceduresProcedures
• Inquiries of Management
• Consider Unusual or Unexpected Relationships
• Consider Other Information
Brainstorming SessionBrainstorming SessionBrainstorming SessionBrainstorming Session
• Allow junior members to benefit from senior members
• Allow more seasoned personnel a fresh set of eyes
• Allows audit management to set the appropriate tone for the audit
• Emphasize possibility of fraud existing in any audit
Specific RisksSpecific RisksSpecific RisksSpecific Risks
• Improper Revenue Recognition
• Management Override of Internal Controls
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1. Audit risk is set according to:A. AICPA guidelinesB. Audit firm policyC. SEC regulationsD. GAAS
B. Audit firm policy
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2. Which of the following is not a component of the fraud triangle?
A. Adequate trainingB. OpportunityC. RationalizationD. Incentives
A. Adequate training
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3. All of the following are objectives of a brainstorming session except:
A. Allow management to set the toneB. Allow for junior members to benefit
from senior membersC. Allow for a fresh outlook on situationD. Allow for identification of actual
occurrences of fraud
D. Allow for identification of actual occurrences of fraud
Audit Risk ModelAudit Risk ModelAudit Risk ModelAudit Risk Model
• 3 Components of Audit Risk– Inherent Risk– Control Risk– Detection Risk
• Illustrating the Model– AR = IR x CR x DR
• Expanded Audit Risk Model– AR = IR x CR x AP x TD
Risk Components MatrixRisk Components MatrixRisk Components MatrixRisk Components Matrix
Assessing the Components of Assessing the Components of Audit RiskAudit Risk
Assessing the Components of Assessing the Components of Audit RiskAudit Risk
• Inherent Risk
• Control Risk
• Detection Risk
Inherent RiskInherent RiskInherent RiskInherent Risk
• Inherent Risk Defined
• Assessing Inherent Risk
• Identifying Significant Inherent Risks
Control RiskControl RiskControl RiskControl Risk
• Control Risk Defined
• Assessing Control Risk– Planned assessed level of control
risk– Actual assessed level of control risk
Detection RiskDetection RiskDetection RiskDetection Risk
• Detection Risk Defined
• Assessing Detection Risk– Planned acceptable level of
detection risk
Interrelationships among Materiality, Interrelationships among Materiality, Detection Risk, and Substantive Audit Detection Risk, and Substantive Audit
EvidenceEvidence
Interrelationships among Materiality, Interrelationships among Materiality, Detection Risk, and Substantive Audit Detection Risk, and Substantive Audit
EvidenceEvidence
Components of Preliminary Components of Preliminary Audit StrategiesAudit Strategies
Components of Preliminary Components of Preliminary Audit StrategiesAudit Strategies
• Assessed level of inherent risk
• Planned assessed level of control risk
• Planned assessed level of analytical procedures risk
• Planned level of tests of details
Three Basic Preliminary Audit Three Basic Preliminary Audit StrategiesStrategies
Three Basic Preliminary Audit Three Basic Preliminary Audit StrategiesStrategies
• Response to Lower Inherent Risks
• A Lower Assessed Level of Control Risk
• A Primary Substantive Approach
Preliminary Audit Strategies Preliminary Audit Strategies and the Audit Risk Modeland the Audit Risk Model
Preliminary Audit Strategies Preliminary Audit Strategies and the Audit Risk Modeland the Audit Risk Model
Preliminary Audit Strategy Preliminary Audit Strategy ComparisonComparison
Preliminary Audit Strategy Preliminary Audit Strategy ComparisonComparison
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4. Which of the following is the correct audit risk model?
A. AR = IR x CR x DRB. IR = AR x CR x DRC. CR = IR x AR x DRD. DR = CR x IR x AR
A. AR = IR x CR x DR
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5. ______ is the risk that a material misstatement could occur and will not be prevented or detected by the entity’s internal controls.
A. Inherent RiskB. Audit RiskC. Control RiskD. Detection Risk
C. Control Risk
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6. The components of preliminary audit strategies include all of the following except:
A. Assessed level of inherent riskB. Planned assessed level of control riskC. Actual assessed level of control riskD. Planned assessed level of analytical
procedures risk
C. Actual assessed level of control risk