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SAS 99 defines fraud as an intentional act that results in a material misstatement in financial statements. There are two types of fraud considered: misstatements arising from fraudulent financial reporting (e.g. falsification of accounting records) and misstatements arising from misappropriation of assets (e.g. theft of assets or fraudulent expenditures).
The lower the audit risk, the higher the materiality will be set. In terms of the Conceptual Framework (see "materiality in accounting" above), materiality also has a qualitative aspect. This means that, even if a misstatement is not material in "Dollar" (or other denomination) terms, it may still be material because of its nature.
Substantive procedures (or substantive tests) are those activities performed by the auditor to detect material misstatement at the assertion level. [1]Management implicitly assert that account balances and disclosures and underlying classes of transactions do not contain any material misstatements: in other words, that they are materially complete, valid and accurate.
For example, if the year-end is 31 December, the hard close may provide the auditors with figures as at 30 November. The auditors would audit income/expense movements between 1 January and 30 November, so that after year end, it is only necessary for them to audit the December income/expense movements and 31 December balance sheet.
There are a couple aspects of evidence that make various audit evidence good quality. This consists of sufficiency and appropriateness. Audit evidence is sufficient when there is an acceptable amount of evidence found. This changes based on the risk of material misstatement and the quality of evidence that was found.
In order for an auditor to avoid liability, they must provide proof that the audit was performed with due diligence, the plaintiff’s losses were not caused by misstated financial statements, the plaintiffs knew of the misstatement at the time the securities were purchased, or the statute of limitations had expired (one year after the ...
In developing that conclusion, the auditor evaluates whether audit evidence corroborates or contradicts financial statement assertions. [2] Second, auditors are required to consider the risk of material misstatement through understanding the entity and its environment, including the entity's internal control.
Although there are many types of risks associated with the audit process, each type primarily has an effect on the overall audit engagement. The effects produced by sampling risk generally can increase audit risk, the risk that an entity's financial statements will contain a material misstatement, though given an unqualified ('clean') audit report.