Audit Planning and Risk Assessment
Planning the engagement
Planning establishes the scope, timing, and direction of the audit and is a continuous process. Candidates must understand acceptance and continuance procedures, engagement letters, and the use of materiality in planning. Know the relationship between overall materiality, performance materiality, and the clearly trivial threshold.
Risk assessment
Audit risk is the risk the auditor expresses an inappropriate opinion. It comprises inherent risk, control risk, and detection risk. Inherent and control risk are risks of material misstatement at the entity level; detection risk is the auditor's risk and is managed by the nature, timing, and extent of procedures. Understand the risk assessment process: obtaining an understanding of the entity and its environment, including internal control, and identifying significant risks.
Traps in questions
Distractors often confuse detection risk with control risk, or imply the auditor can reduce inherent risk. Others muddle performance materiality with overall materiality. Watch for questions suggesting materiality is fixed at planning and never revised; it must be reassessed as the audit progresses.
Rule of thumb
Higher assessed risk of material misstatement means lower acceptable detection risk, which requires more persuasive evidence and more substantive procedures performed closer to period end. Inverse relationship: risk up, detection risk down.
Worked example
If inherent risk is assessed as high because of complex revenue contracts, the auditor must set detection risk low. That means increasing the extent of substantive testing, involving more experienced staff, and performing procedures nearer year-end, not reducing sample sizes.