Planning The Audit: Identifying, Assessing and Responding to the Risk of Material Misstatement

16 important questions on Planning The Audit: Identifying, Assessing and Responding to the Risk of Material Misstatement

Auditors make materiality judgements for purpose of:


1) audit planning
2) evidence evaluation after audit procedures are completed

Which materiality levels are there?


1. Overall materiality (aka planning materiality)
2. Performance materiality (aka tolerable error)
3. Posting materiality

Which items whould the auditor consider when setting materiality?


- FS items on which users will focus their attention
- Nathere of the client and industry
- Size of the client
- Manner in which the client is financed
- Volatility of the benchmark
- Intensity of the level of analyst following
  • Higher grades + faster learning
  • Never study anything twice
  • 100% sure, 100% understanding
Discover Study Smart

Client business risks

Client business risks are risks affecting the business operations and potential outcomes of an organization's activities. These risks likely have pervasive effects across an organization and can potentially affect the risk of material misstatement for many accounts and assertions (the risk of material misstatement at the FS level).

Examples of business risks


- Overall economic climate
- Technological change
- Competitors actions
- Geographic locations of suppliers

Which resources can an auditor use when obtaining an understanding of the client's business and associated business risks?


- Management inquiries
- Review of client's budget
- Tour of client's plant and operations
- Review relevant government regulations and client's legal obligations
- Knowledge management systems
- Online searches
- Review of SEC filings
- Company websites
- Economic statistics
- Professional practice bulletins
- Stock analyst reports
- Company earnings calls

Which risks are included in the audit risk model?


- Inherent risk
- Control risk
- Audit risk
- Detection risk

Audit risk model

Audit Risk = Inherent Risk x Control Risk x Detection Risk

To encourage interactive and constructive group dialogue and idea exchange, the audit team typically follows important guidelines during the brainstorm session:


- Suspension of criticism
- Freedom of expression
- Quantity of idea generation
- Respectful communication

Which steps do brainstorming sessions normally follow?


1. Review prior year client information
2. Consider client information, particularly with respect to the fraud triangle
3. Integrate information from step 1 and 2 into an assessment of the likelihood of fraud in the engagement
4. Identify audit responses to fraud risks

What are two frequently used analytical procedures during the risk assessment?

Trend analysis & ratio analysis

What does a low level of detection risk means?

A low level of detection risk means that the audit firm is not willing to take as much of a risk of not detecting a material misstatement through its substantive procedures.

What happens if a company has weak controls?

Because of the weak controls, it is unlikely that the auditor will perform any testing of controls, and the use of substantive analytical procedures will probably be limited. Thus, the auditor must perform extensive direct tests of the account balances to identify any misstatements.

Nature of risk respons

This includes the types of audit procedures the auditor will perform, with a focus on the appropriateness (relevance and reliability) of those procedures.

Timing of risk response

The timing of risk response refert to when the auditor conducts the audit procedures and whether the auditor conducts those procedures at announced or predictable times.

Extent of risk response

The extent of risk response refers to the sufficiency of evidence that is necessary given the risk of material misstatement and the level of acceptable audit risk.

The question on the page originate from the summary of the following study material:

  • A unique study and practice tool
  • Never study anything twice again
  • Get the grades you hope for
  • 100% sure, 100% understanding
Remember faster, study better. Scientifically proven.
Trustpilot Logo