Audit Risk

Risk of Material Misstatement (RMM) = Inherent Risk * Control Risk 
- Functions of the Client and its environment

Audit Risk = RMM * Detection Risk

RMM & DR has an inverse relationship: 

• RMM high (bad), DR low, substantive tests high, (control risk increase) 
• RMM low (good), DR high, substantive tests low

Terms defined:

• Audit Risk - risk of failing to discover material misstatement 
• Inherent Risk - risk that material misstatement will actually occur in the accounting system before consideration of internal controls
• Control Risk - risk that material misstatement (once occurred) will fail to be caught by internal control policies and procedures of the company
• assessed in terms of financial statement assertions
• important to assess as it affects the level of detection risk that auditor may accept 
• Detection Risk - risk that auditor will fail to detect misstatement with audit procedures
• controlled by auditor

Audit - General Issues: Part 2

General Accepted Auditing Standards & Elements - AICPA provided PDF

3 General Standards:

1. Adequate training & proficiency
2. Independence of mental attitude
3. Due professional care 

3 Fieldwork Standards:

1. Proper planning & supervision
2. Understanding the entity & its environments, including internal control
3. Sufficient appropriate audit evidence

4 Reporting Standards:

1. Financials are presented in accordance with GAAP
2. Circumstances where principals are not consistent with PY are identified
3. State any informative disclosures that are not reasonably adequate
4. Express an opinion

5 Quality Control Elements:

1. Independence, integrity, objectivity
2. Personnel management
3. Acceptance & continuation of clients
4. Engagement performance
5. Monitoring

To succeed in an action against the auditor, the Client must be able to show the following:

1. CPA had a duty to perform
2. CPA breached the contract
3. Client suffered losses
4. There is a close causal connection between the auditor's behavior and damages suffered by the Client 

Audit - General Issues: Part 1

Terms and Definitions:

Risk - fundamental concept that underlies audit process

Materiality & audit risk - underlies application of GAAS

Quality control - process to provide firm with reasonable assurance that its personnel comply with applicable professional standards

Public Company Accounting Oversight Board (PCAOB):

• Established by Sarbanes-Oxley Act
• Appointed & overseen by the SEC