Audit and Assurance
Audit Process and Risk
Understand the purpose of an audit (reasonable assurance), the audit risk model (inherent risk × control risk × detection risk), and the phases: planning, risk assessment, response, reporting. Candidates must know how to assess materiality (overall materiality, performance materiality) and the concept of professional scepticism.
Internal Controls and Evidence
Know the components of internal control (control environment, risk assessment, control activities, information and communication, monitoring). Understand the types of audit evidence (inspection, observation, inquiry, confirmation, recalculation, re-performance, analytical procedures) and their reliability. Traps: treating inquiry alone as sufficient; confusing the auditor's responsibility for fraud (reasonable assurance, not guarantee) with management's responsibility.
Audit Reports
Modified opinions: qualified, adverse, disclaimer. Understand the conditions for each (material but not pervasive vs material and pervasive). Emphasis of Matter and Other Matter paragraphs. Traps: misclassifying a scope limitation as a qualified opinion when it is pervasive (should be disclaimer).
Worked Example
During an audit, the auditor finds that management has not recognised an impairment of $2 million on a plant. The auditor estimates the effect is material but not pervasive. The appropriate opinion is qualified (except for the effects of the matter). If the matter were pervasive, an adverse opinion would be required.
Rule of thumb: Detection risk is the only risk the auditor controls; it is inversely related to the extent of substantive testing.