Slide 1GOOD MORNING/AFTERNOONSlide 3AUDIT RISKMATERIALITYAUDIT RISK (AR) IS A FUNCTION OFINHERENT RISK (IR)SOURCES OF INFORMATION FOR INHERENT RISK ASSESSMENTFACTORS AFFECTING INHERENT RISK ASSESSMENTCONTROL RISK (CR)SOURCES OF INFORMATION FOR CONTROL RISK ASSESSMENTDETECTION RISK (DR)SOURCES OF INFORMATION FOR DETECTION RISK ASSESSMENTFORMS OF AUDIT RISK MODELFACTORS TO CONSIDER WHEN ESTABLISHING ACCEPTABLE AUDIT RISK (AAR)MANAGEMENT FRAUD (INTENTIONAL MISSTATEMENTSFACTORS RELATING TO FRAUDULENT FINANCIAL REPORTINGSlide 18Slide 19GOOD MORNING/AFTERNOONAUDIT RISKCondition of FinancialStatementsOpinionIssuedMaterial MisstatementExistsUnqualified(Audit Risk)Material MisstatementExistsNon-GAAPMaterial MisstatementDoes Not ExistUnqualifiedMaterial MisstatementDoes Not ExistNon-GAAPMATERIALITYMateriality DefinedAn Item is Material if it is Reasonably Possible that it Would Influence the Judgment of a Person using the informationFactors to Consider when Determining MaterialityUsers of Financial InformationRelative Size of Financial Statement NumbersFinancial Bases (Net Income, Sales, Current Assets, Current Liabilities, Total Assets)Qualitative Factors (Trends, Contractual Obligations Fraud)AUDIT RISK (AR) IS A FUNCTION OFInherent Risk (IR)Control Risk (CR)Detection Risk (DR)INHERENT RISK (IR)Is a Function of Factors Not Controllable by ManagementNot Controllable by AuditorVaries from Cycle to Cycle and Assertion to AssertionSOURCES OF INFORMATION FOR INHERENT RISK ASSESSMENTPredecessor AuditorLocal Attorneys, Banks, Investment Bankers, Underwriters, Better Business Bureau, Etc.Private InvestigatorsOther Clients in IndustryPrior ExperienceClient PersonnelMinutesPublished Sources (AICPA Guides, Trade Journals)Analytical ProceduresFACTORS AFFECTINGINHERENT RISK ASSESSMENTIntegrity of ManagementExternal Client MotivationsRelated PartiesNon-Routine TransactionsSubjectivity/Complexity of AccountActivity in AccountSusceptibility to Theft (Defalcation)Nature of Client’s BusinessInitial versus Repeat EngagementResults of Prior AuditsUnexpected Account BalancesUnusual Items in AccountCONTROL RISK (CR)Is a Function of Factors Controllable by ManagementNot Controllable by AuditorVaries from Cycle to Cycle and Assertion to AssertionSOURCES OF INFORMATION FOR CONTROL RISK ASSESSMENTPrior Year Working PapersClient PersonnelClient Procedures ManualsMinutesProcedures to Obtain an UnderstandingTests of ControlsSubstantive TestsDETECTION RISK (DR)Is a Function of Factors Not Controllable by ManagementControllable by AuditorVaries from Cycle to Cycle and Assertion to AssertionSOURCES OF INFORMATION FOR DETECTION RISK ASSESSMENTNature, Timing and Extent ofAnalytical ProceduresSubstantive Tests of TransactionsTests of Details of BalancesFORMS OF AUDIT RISK MODELPlanning FormulaPDR = AAR/(IR X CR)PDR Represents Planned Detection RiskAAR Represents Acceptable Audit RiskAAR Same for All Cycles and ObjectivesEvaluation FormulaAR =IR x CR x DRFACTORS TO CONSIDER WHEN ESTABLISHING ACCEPTABLE AUDIT RISK (AAR)Users Reliance on the Financial StatementsClient SizeDistribution of OwnershipNature and Amount of LiabilitiesLikelihood of Financial DifficultyLiquidity PositionProfits in Previous YearsMethod of Financing GrowthNature of Client's OperationsCompetence of ManagementIntegrity of ManagementMANAGEMENT FRAUD(INTENTIONAL MISSTATEMENTSResults fromFraudulent Financial ReportingMisappropriation of AssetsFACTORS RELATING TO FRAUDULENT FINANCIAL REPORTINGManagement’s Characteristics and Influence over the Control EnvironmentIndustry ConditionsOperating Characteristics and Financial StabilityFACTORS RELATING TO FRAUDULENT FINANCIAL REPORTINGSusceptibility of Assets to MisappropriationClient