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Chapter 7 notes.docx

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York University
Administrative Studies
ADMS 4552

ADMS 4552 Chapter 7 notes - Audit risk: auditor’s willingness to permit material misstatements to exist after completing the audit o Complement to assurance - want 98% assurance, so 2% audit risk - Inherent risk: auditor’s assessment of expectation of material misstatement before considering internal control - Control risk: auditor’s assessment of effectiveness of internal control to prevent or detect material misstatements o 1. Assessment whether client’s internal control is effective o 2. Auditor’s intention to rely on internal controls o Get this by getting an understanding of IC, see the design effectiveness, and test for effectiveness - Planned detection risk: extent of evidence the auditor plans to accumulate o Dependent on the other three factors in the model o Determines amount of material auditor must collect Audit risk model - Reflects relationship between audit risk, inherent risk, control risk, and planned detection isk - AR = IR x CR x PDR - Client business risk - the risk that client will fail to achieve objectives (going concern) - Engagement risk - (auditor business risk) that the firm will suffer after the audit is finished Determining Risk - If after the completion of the audit, the client will suffer financial difficulties - increases risk o Increase in business risk for the auditor, reduce audit risk  Liquidity position  Profits/losses in previous years  Method of financing growth  Nature of client’s operations  Extent of reliance
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