RSM423H1 Lecture Notes - Lecture 2: Mathematically Correct, Audit Risk, Analytical Review
Document Summary
P527 audit risk ir*cr*dr (handout deals with cr) Chapter 10 + appendix 10b (lecture notes more important) Level/lack of integrity (cid:271)otto(cid:373) right: opportu(cid:374)it(cid:455) (cid:271)otto(cid:373) left. Necessary but not sufficient condition = signs of fraud. (cid:272)utti(cid:374)g (cid:271)a(cid:272)k (cid:272)ost o(cid:374)l(cid:455) to raise re(cid:448)e(cid:374)ue e(cid:448)e(cid:374) if it hurts the (cid:272)o(cid:373)pa(cid:374)(cid:455) I(cid:374) mu , (cid:272)l = (cid:1005) max effectiveness risk. Ge(cid:374)erall(cid:455) (cid:894)i. e. i(cid:374) (cid:374)or(cid:373)al distri(cid:271)utio(cid:374)(cid:895), the h(cid:455)pothesis test set up deter(cid:373)i(cid:374)es (cid:449)hi(cid:272)h risk is related to (cid:1005)- cl (+) approach: null h=ho, e(error)=0, then cl=1-efficiency risk (-) approach: null h, e=mm, then cl=1-effe(cid:272)ti(cid:448)e(cid:374)ess risk rele(cid:448)a(cid:374)t for auditi(cid:374)g. If increasing the sample size, the acceptance curve reaches closer to the perfect auditor (horizontal line) if keepi(cid:374)g (cid:272)l the sa(cid:373)e redu(cid:272)e the effi(cid:272)ie(cid:374)(cid:272)(cid:455) risk a(cid:374)d i(cid:374)(cid:272)rease pro(cid:271) of a(cid:272)(cid:272)epta(cid:374)(cid:272)e (cid:272)orre(cid:272)t de(cid:272)isio(cid:374) Several ways to control efficiency risk: use k>0 on valuations sample size, reduce planned p=mm-e(cid:454)pe(cid:272)ted error rate for pla(cid:374)(cid:374)i(cid:374)g sa(cid:373)ple size (cid:374)=r/p. Identified misstatement = # of errors = 2.
