Professional Documents
Culture Documents
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Learning objectives
7.1 Explain the factors that influence the
assessment of inherent risk.
7.2 Explain the auditors consideration of the risk
of fraud.
7.3 Explain the auditors consideration of related
parties.
7.4 Explain the auditors consideration the
appropriateness of the going concern basis.
7.5 Explain the concept of materiality.
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ASA/ISA 200:
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Integrity of management.
Management experience, knowledge and
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Risk of fraud
Auditors responsibility for identifying and
Fraud
Fraud is defined in ASA 240.11 (ISA 240.11) as:
An intentional act by one or more individuals among
reporting
Misstatement resulting from misappropriation of
assets.
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records or documents
Suppression or omission of the effects of
policies.
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Misappropriation of assets
involve:
Embezzling receipts
Stealing assets
Causing an entity to pay for goods not
received
Using an entitys assets for personal
use.
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Fraud in practice
A 2010 KPMG survey of fraud in Australia and
Earnings management
Earnings management occurs when judgment in financial
market-based.
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Illegal acts
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parties
Fraudulently transferring assets at amounts
significantly above or below market value
Engaging in complex transactions with related
parties, such as special purpose entities, that are
structured to misrepresent the financial position or
performance of the entity.
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parties.
4. Inquire about managements and directors affiliations
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Financial indicators:
High gearing or fixed-term or reliance on short-term loans
Withdrawal of financial creditors, inability to pay creditors
Other indications:
Non-compliance with capital or statutory
requirements
Legal proceedings against the entity
Adverse changes in legislation or government
policy
Uninsured or underinsured disasters.
Mitigating factors
Auditor should consider mitigating factors.
These include:
replacement
Debt factorsunused lines of credit, ability
to renew or extend existing loans
Cost factorsability to reduce costs
Equity factorsadditional contributions
from owners, subsidiaries or associates.
Materiality
Auditor must make preliminary assessment of materiality
Performance materiality
ASA/ISA 320.11 requires the auditor to set performance
Materiality level
As noted by ASA/ISA 320.6, the auditor will consider
Choice of base
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(if available)
Annualised interim financial
information
Previous periods financial reports.
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a whole.
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Accounting materiality
Materiality is a matter of relative significance.
Any quantitative guideline for determining
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Summary
Inherent risk is a major component of audit risk.
Inherent risk is the risk of errors occurring due to the