What does significant risk mean on the CPA exam?
Significant risk. A risk of material misstatement that warrants special audit attention because of its likelihood or its size. Every audit presumes at least one, improper revenue recognition.
Defined against AU-C 315.12.
Which CPA exam sections use significant risk?
Significant risk appears in the AUD section of the CPA exam.
Other terms defined against AU-C 315
- application controls: Controls built into one business process or system, such as a validity check on an input field or a three-way match.
- assessed risk: The auditor's judgment about the risk of material misstatement at the assertion level, combining inherent and control risk.
- control environment: The governance and management functions and the attitudes, awareness, and actions of those charged with governance and management concerning the entity's system of internal control.
- general controls: Controls over the IT environment as a whole -- access, change management, operations -- that everything else depends on.
- general IT control: A control over the entity's IT processes that supports the continued effective functioning of information-processing controls and the integrity of information.
- information and communication: One of the five components of internal control: how an entity obtains the information it needs and gets it to the people who have to act on it.
- information-processing control: A control over processing in an IT application or a manual information process that directly addresses a risk to the integrity of information.
- rights and obligations: The assertion that the entity genuinely owns the assets it reports and genuinely owes the liabilities.
Related terms
- risk of material misstatement: The risk that the statements are materially misstated before the audit begins.
- control risk: The risk that the entity's own controls will not prevent, or detect and correct, a material misstatement on a timely basis.
- inherent risk: The susceptibility of an assertion to material misstatement before any control is considered.
- revenue recognition: Deciding when a sale becomes revenue.
- significant deficiency: A deficiency, or combination of deficiencies, less severe than a material weakness but important enough to merit attention by those charged with governance.
- cash equivalents: Short-term, highly liquid investments readily convertible to known amounts of cash and so near maturity that interest rate changes pose insignificant risk.