CPA Exam - Auditing and Attestation (AUD)

Issued when financial statements are materially misstated or there is a scope limitation, but the impact is material but NOT pervasive ("except for" opinion).

Issued when financial statements contain misstatements that are both material AND pervasive, indicating the statements do not present fairly.

Issued when the financial statements are presented fairly, in all material respects, in accordance with the applicable financial reporting framework (e.g., US GAAP or IFRS).

Generally Accepted Auditing Standards (GAAS) provide measures of audit quality. AICPA ASB sets standards (SAS) for private companies, non-profits, and governmental entities. The PCAOB sets standards (AS) for public companies (issuers).

The relationship between audit risks expressed as: $\text{Audit Risk (AR)}=\text{Inherent Risk (IR)}\times \text{Control Risk (CR)}\times \text{Detection Risk (DR)}$. Risk of Material Misstatement (RMM) is $\text{IR}\times \text{CR}$.

The susceptibility of a financial statement assertion to a material misstatement before consideration of any related internal controls. It is driven by the nature of the business, transaction complexity, and subjective estimates.

The risk that a material misstatement will not be prevented, or detected and corrected, on a timely basis by the entity's internal control system. It is a function of the entity's internal control effectiveness.

The risk that the auditor's substantive procedures will fail to detect a material misstatement. Unlike IR and CR, DR is directly controlled by the auditor through the nature, timing, and extent of audit procedures.