cpa audit review ch3 review 7

Enhancing the auditor’s understanding of the entity and its environment.

The auditor obtains an understanding of the entity and its environment, including its internal control, to identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error. Risk assessment procedures are performed to obtain the understanding. They include (1) inquiries of management and others within the entity, (2) analytical procedures (analytical procedures used to plan the audit), and (3) observation and inspection

D.Detection.

Audit risk consists of (1) the risks of material misstatement (inherent risk combined with control risk) and (2) detection risk. The RMMs are the entity’s risks, and detection risk is the auditor’s risk. Detection risk is the risk that the procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a material misstatement. It is a function of the effectiveness of an audit procedure and its application by the auditor. Detection risk is the only component of audit risk that can be changed at the auditor’s discretion. An auditor who performs procedures at an interim date should cover the remaining period. The longer the remaining period, the greater the detection risk resulting from performing procedures at an interim date.

A.An auditor has responsibility to detect noncompliance with laws and regulations that has a direct effect on the financial statements.

According to AU-C 250, the auditor should obtain sufficient appropriate audit evidence regarding material amounts and disclosures in the financial statements that are determined by the provisions of those laws and regulations generally recognized to have a direct effect on their determination.

Enhancing the auditor’s understanding of the transactions and events that have occurred since the last audit.

Analytical procedures applied as risk assessment procedures (analytical procedures used to plan the audit) at the beginning of the audit may improve the understanding of the client’s business and significant transactions and events since the last audit. They also may identify unusual transactions or events and amounts, ratios, and trends that might indicate matters with audit implications (AU-C 315).

D.Make a preliminary judgment about materiality.

Materiality should be established for planning purposes. The concept of materiality recognizes that some but not all matters are important for fair presentation of the financial statements. The auditor is responsible for planning and performing the audit to obtain reasonable assurance that material misstatements are detected.