Introduction to AUDI8419: theory recap

Audit Risk consists of which three risks and explanations?

• Inherent risk

  This represents how susceptible a balance is to misstatements and does not consider internal controls

• Control risk

  This is the risk that the internal controls of the business are too poor to prevent, detect, or correct misstatements.

• Assertion risk

  This represents the risk that the assertions are incorrect, affecting the risk of misstatement of the financial statements.

• Inherent risk

  this is the risk that balances are incorrect, and that the auditor will not pick these misstatements in time.

• Detection risk

  This is the risk that the auditors will not detect a misstatement that exists and the misstatement is material.

You are the auditor of XYZ Limited, and you are currently in the planning phase of the FY 2025 audit for the year ended 30 June 2025. The financial director has expressed urgency, requesting that the audit opinion be signed by 12 August 2025.

Because you are assessing the risk of material misstatement, this is an example of:

• Detection risk: The auditor will not have adequate time to detect material misstatements, which will lead to an incorrect audit opinion.

• Risk of material misstatement at the assertion level: All assertions will be incorrect due to the client preparing the financial statements incorrectly.

• Inherent risk: The client may not have time to prepare the financial statements correctly, resulting in errors in the financial statements.

• Control risk: The audit client may have poor controls that are not detected, resulting in errors in the financial statements.

You are the auditor of XYZ Limited and are currently performing substantive audit procedures on payroll. You have determined that the payroll clerk is responsible for recording payroll and has write access to the payroll schedule. The payroll manager has read-only access to the payroll schedule and is responsible for approving the payroll.

Which of the following is NOT an example of an appropriate substantive procedure?

• Using CAATs, inspect the access tables to ensure that the payroll clerk cannot approve the payroll function and the payroll manager cannot edit the payroll.

• Trace the payroll closing balance as per the payroll schedule to the general ledger and the annual financial statements to ensure it has been consistently recorded

• After creating an expectation for payroll fluctuations, perform analytical procedures for the month-on-month payroll, and follow up with management for any inconsistencies.

You are the auditor of XYZ Limited and are currently performing substantive audit procedures on Revenue.

For a sample of invoices obtained from the Revenue schedule, you trace these invoices to the general ledger, and there are no exceptions.

Which risk and assertion are you testing for?

• Risk of material misstatement related to the overstatement of revenue – completeness

• Risk of material misstatement related to the understatement of revenue – completeness

• Risk of material misstatement related to the overstatement of revenue – accuracy, valuation, and allocation

• Risk of material misstatement related to the understatement of revenue – existence.

Identify the Risk of Material Misstatement at the assertion level, and indicate whether it affects the likelihood or magnitude of material misstatement.

• There is a risk of material misstatement with reference to depreciation, impairment, and useful lives as these amounts may not be calculated correctly.

  (magnitude)

• Machines make up a significant portion of the financial statements, meaning that errors in this balance would be material

  (magnitude)

• There is a risk of material misstatement with reference to depreciation, impairment, and useful lives as these amounts may not be calculated correctly.

  (likelihood)

• Machines make up a significant portion of the financial statements, meaning that errors in this balance would be material

  (likelihood)

Paint-It-All hires three machines and owns three machines. What is the Risk of Material Misstatement and assertions being affected?

• Because Paint-It-All hires and owns different machines, there is a risk that the ownership of machines is accounted for incorrectly (Cut-off)

• Because Paint-It-All hires and owns different machines, there is a risk that the ownership of machines is accounted for incorrectly (Rights)

• Because not all machines are owned by Paint-It-All, there is a risk that machines are not impaired correctly (Accuracy, Valuation, and Allocation)

• Because not all machines are owned by Paint-It-All, there is a risk that machines are not impaired correctly (Completeness)

The objective of Substantive procedures is to reduce (?) to an acceptable level

What type of procedures can ONLY be performed for Tests of Controls?

• Observe and Reperform

• Reperform and Inspect

• Confirmations and analytical procedures

• Enquire

What type of procedures can ONLY be performed for substantive procedures?

• Observe and Reperform

• Enquire and Inspect

• Recalculate and Confirmations

• Analytical procedures and Recalculations