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distribution permitted without the prior written consent of McGraw-Hill Education. 5-1
The possibility that the auditors may
unknowingly fail to appropriately modify
their opinion on financial statements that are
materially misstated.
This is the risk that the auditors will issue an
unqualified opinion on financial statements that
contain a material departure from GAAP.
Auditors must obtain sufficient appropriate
audit evidence to reduce audit risk to a low
level in every audit.
AR = Audit risk
IR = Inherent risk
CR = Control risk
DR = Detection risk
Steps involved
Develop expectation of account (or ratio) balance
Determine amount of difference that can be accepted without
investigation
Compare the company’s account (ratio) with the expectation
Investigate and evaluate significant differences