Video: Audit Risk Objectives

In this lesson, the concept of audit risk is introduced with a focus on its objectives. The lesson explains how planned audit procedures can address the risks of material misstatements due to fraud or error. The importance of considering both fraud and error in material misstatements is discussed, highlighting their equal significance from an auditor's perspective. The lesson goes on to explore the analysis of the risk of material misstatement, including the potential impact of individual and cumulative misstatements. The relationship between the components of audit risk – inherent, control, and detection risk – and the extent of testing required is also explained, emphasizing the importance of a thorough audit risk assessment.

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Video Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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First off, we want to develop planned audit procedures that are going to be responsive to any identified risks of materials misstatement due to fraud or error. So just a couple of things to unpack there. One, the risk of material misstatement is going to be made up of inherent and control risk. And we will see all of this as we get in. So no need to scramble to write any of this down so far, but fraud or error, that is also a big point we make throughout the exam, is that material misstatement could happen due to fraud or error. Both are equally as important. $10,000 material misstatement due to fraud is just as important as due to error. Now, yes, obviously with fraud, there's other issues, more possibly pervasive issues where there could be fraud in other places. And obviously you need to possibly fire someone, deal with all of that. But from your perspective as the auditor, a problem, a material problem is a material problem. So due to fraud or error at the relevant assertion level for significant classes of transactions and account balances. Lastly, we want to analyze the risk of material misstatement, which again, we will go into in much more detail, including the potential impact of individual and cumulative misstatements, because we could have one small misstatement or in the aggregate, how do all these tiny misstatements come together to provide a basis for planned audit procedures. We're gonna see how our components of audit risk, the three risks, inherent control and detection risk, how they come together and determine how much testing we're gonna do. So this is an important section because all of the work you're gonna do in an audit comes down to what you assess audit risk

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Identify Risk During Planning

Module: 5 Concepts, 62 Videos

Fraud & General Risk at All Levels Overview

0:22

Fraud & General Risk at All Levels Objectives

1:19

Introduction to Fraud and General Risk at All Levels

2:04

The Fraud Triangle