Audit Risk and Materiality

This class explores the critical elements of audit risk, focusing on how auditors identify, assess, and address the risks of material misstatement in financial statements. The class emphasizes the importance of understanding the client’s business risks and their potential to affect financial reporting. Key audit concepts such as inherent risk (IR), control risk (CR), and detection risk (DR) are examined within the framework of the Audit Risk Model (AR = IR x CR x DR). Additionally, the class covers important audit standards from the Public Company Accounting Oversight Board (PCAOB), such as AS 2101 (Audit Planning), AS 2110 (Risk Assessment), and AS 1105 (Audit Evidence). Students are introduced to tools such as PESTLE analysis (Political, Economic, Social, Technological, Legal, and Environmental factors), the SWOT analysis, and a review of 10-K filings to understand how companies manage and disclose business risks. Through case studies and real-world examples, students practice mapping these business risks to potential financial statement risks, learning how to evaluate significant accounts, disclosures, and assertions.

Why is this important?

Properly assessing risk and materiality is fundamental to a high-quality audit. This class equips students with a robust understanding of the audit risk assessment process, enabling them to assess business risks, map them to financial statement risks, and apply audit standards effectively.

Materials:

Case: Mapping Business Risk to Financial Statement Risk.
Slides: will be available for download by the beginning of class in either powerpoint or pdf formats.
Data: A data update may be required for this class. To ensure your files are the most up-to-date, navigate to ACCTG521_Labs folder and run the command git pull.
Analytics Tools: Alteryx two-sample t-test tool
Analytics Tools: Git and GitHub

Review and Extension:

Previously we have discussed the economics of disclosure, audit and assurance over financial information. We extend this understanding by further exploring the role of risk in the audit and how that affects audit planning.

Preparation:

1. Before class, please read through the Mapping Business Risk to Financial Statement Risk Case.

Class Plan:

Teams: during this class, please sit in your assessment teams.

1. This class will focus heavily on the discussion and implementation of the analysis discussed in the case.
2. We will first undertake warm-call discussions around central features of the case.
3. In teams, we will undertake PESTLE and SWOT analysis and dynamic audit planning for one or both of the companies being examined by each team.