About Me
CPA
1 Regulation (REG)
1.1 Ethics, Professional Responsibilities, and Federal Tax Procedures
1.1 1 Professional ethics and responsibilities
1.1 2 Federal tax procedures and practices
1.1 3 Circular 230
1.2 Business Law
1.2 1 Legal rights, duties, and liabilities of entities
1.2 2 Contracts and sales
1.2 3 Property and bailments
1.2 4 Agency and employment
1.2 5 Business organizations
1.2 6 Bankruptcy
1.2 7 Secured transactions
1.3 Federal Taxation of Property Transactions
1.3 1 Basis determination and adjustments
1.3 2 Gains and losses from property transactions
1.3 3 Like-kind exchanges
1.3 4 Depreciation, amortization, and depletion
1.3 5 Installment sales
1.3 6 Capital gains and losses
1.3 7 Nontaxable exchanges
1.4 Federal Taxation of Individuals
1.4 1 Gross income inclusions and exclusions
1.4 2 Adjustments to income
1.4 3 Itemized deductions and standard deduction
1.4 4 Personal and dependency exemptions
1.4 5 Tax credits
1.4 6 Taxation of individuals with multiple jobs
1.4 7 Taxation of nonresident aliens
1.4 8 Alternative minimum tax
1.5 Federal Taxation of Entities
1.5 1 Taxation of C corporations
1.5 2 Taxation of S corporations
1.5 3 Taxation of partnerships
1.5 4 Taxation of trusts and estates
1.5 5 Taxation of international transactions
2 Financial Accounting and Reporting (FAR)
2.1 Conceptual Framework, Standard-Setting, and Financial Reporting
2.1 1 Financial reporting framework
2.1 2 Financial statement elements
2.1 3 Financial statement presentation
2.1 4 Accounting standards and standard-setting
2.2 Select Financial Statement Accounts
2.2 1 Revenue recognition
2.2 2 Inventory
2.2 3 Property, plant, and equipment
2.2 4 Intangible assets
2.2 5 Liabilities
2.2 6 Equity
2.2 7 Compensation and benefits
2.3 Specific Transactions, Events, and Disclosures
2.3 1 Leases
2.3 2 Income taxes
2.3 3 Pensions and other post-retirement benefits
2.3 4 Derivatives and hedging
2.3 5 Business combinations and consolidations
2.3 6 Foreign currency transactions and translations
2.3 7 Interim financial reporting
2.4 Governmental Accounting and Not-for-Profit Accounting
2.4 1 Governmental accounting principles
2.4 2 Governmental financial statements
2.4 3 Not-for-profit accounting principles
2.4 4 Not-for-profit financial statements
3 Auditing and Attestation (AUD)
3.1 Engagement Planning and Risk Assessment
3.1 1 Engagement acceptance and continuance
3.1 2 Understanding the entity and its environment
3.1 3 Risk assessment procedures
3.1 4 Internal control
3.2 Performing Audit Procedures and Evaluating Evidence
3.2 1 Audit evidence
3.2 2 Audit procedures
3.2 3 Analytical procedures
3.2 4 Substantive tests of transactions
3.2 5 Tests of details of balances
3.3 Reporting on Financial Statements
3.3 1 Audit report content
3.3 2 Types of audit reports
3.3 3 Other information in documents containing audited financial statements
3.4 Other Attestation and Assurance Engagements
3.4 1 Types of attestation engagements
3.4 2 Standards for attestation engagements
3.4 3 Reporting on attestation engagements
4 Business Environment and Concepts (BEC)
4.1 Corporate Governance
4.1 1 Internal controls and risk assessment
4.1 2 Code of conduct and ethics
4.1 3 Corporate governance frameworks
4.2 Economic Concepts
4.2 1 Microeconomics
4.2 2 Macroeconomics
4.2 3 Financial risk management
4.3 Financial Management
4.3 1 Capital budgeting
4.3 2 Cost measurement and allocation
4.3 3 Working capital management
4.3 4 Financial statement analysis
4.4 Information Technology
4.4 1 IT controls and security
4.4 2 Data analytics
4.4 3 Enterprise resource planning (ERP) systems
4.5 Operations Management
4.5 1 Strategic planning
4.5 2 Project management
4.5 3 Quality management
4.5 4 Supply chain management
3 1 3 Risk Assessment Procedures Explained

1 3 Risk Assessment Procedures Explained

Key Concepts

Risk Assessment

Risk assessment is the process of identifying and evaluating risks that could impact the achievement of audit objectives. It involves understanding the entity and its environment, including its internal control, to assess the risks of material misstatement.

Inherent Risk

Inherent risk is the susceptibility of an assertion about a class of transaction, account balance, or disclosure to a material misstatement, assuming there are no related internal controls. It is influenced by factors such as the complexity of transactions and the nature of the industry.

Example: A company in the financial services industry may have higher inherent risk due to the complexity of its transactions and regulatory requirements.

Control Risk

Control risk is the risk that a misstatement that could occur in an assertion and that could be material will not be prevented or detected on a timely basis by the entity's internal control. It is assessed based on the effectiveness of the entity's controls.

Example: If a company has weak internal controls over financial reporting, the control risk is higher, as there is a greater likelihood of material misstatements going undetected.

Detection Risk

Detection risk is the risk that the auditor's procedures will not detect a misstatement that exists in an assertion and that could be material. It is influenced by the nature, timing, and extent of the audit procedures performed.

Example: If an auditor relies heavily on analytical procedures without performing substantive tests, the detection risk may be higher, as there is a greater chance of undetected material misstatements.

Audit Risk Model

The audit risk model is a framework used to assess the overall risk of material misstatement in the financial statements. It is expressed as: Audit Risk (AR) = Inherent Risk (IR) x Control Risk (CR) x Detection Risk (DR).

Example: If an auditor assesses inherent risk at 80%, control risk at 50%, and detection risk at 25%, the overall audit risk would be 10% (0.80 x 0.50 x 0.25).

Risk Assessment Procedures

Risk assessment procedures are the actions taken by the auditor to obtain an understanding of the entity and its environment, including its internal control, to identify and assess the risks of material misstatement.

Example: Procedures may include inquiries of management, analytical procedures, and observation of the entity's operations to identify potential risks.

Examples and Analogies

Consider risk assessment as a "safety check" before embarking on a journey. Inherent risk is like the natural hazards of the route, control risk is the reliability of the vehicle's safety features, and detection risk is the effectiveness of the driver's ability to spot hazards.

The audit risk model is akin to calculating the overall safety of the journey by considering all these factors. Risk assessment procedures are the steps taken to gather information about the route, vehicle, and driver before starting the journey.

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